rorces    ^Vhich  iSdake 
Prices 

By 
WARREN  F.  HICKERNELL,  Ph.  D. 


Director,  Bureau  of  Business  Conditions,  Alexander  Hamilton 
Institute.  Lecturer  on  "Panics  and  Depressions,"  School  of  Com- 
merce, Accounts  and  Finance,  New  York  University.  Formerly 
Mana^in^  Editor,  Brookmire  Economic  Service.  Author,  "Business- 
Cycles,"  and  numerous  Articles  on  Finance. 


AMERICAN  INSTITUTE  OF  FINANCE 
BOSTON 


OUR 
''COMPLETE   EDUCATIONAL   COURSE" 
IN  THE  SCIENCE  OF 
MAKING   MONEY   MAKE   MORE   MONEY 

This  list  is  arranged  in  the  order  of  proper  reading.  The 
books  are  accompanied  by  a  series  of  test  questions,  key  prob- 
lems and  analyses  outlines,  enabling  the  student  to  apply  the 
knowledge  acquired  to  immediate  stock  market  and  investment 
-conditions. 


L  Developing  Financial  Skill 

2.  Forces  Which  Make  Prices 

3.  Manipulation  and  Market 

Leadership 

4.  Handling  a  Brokerage  Ac- 

count 

5.  Market  Information 


IL  Investment  Securities 

12.  Business  Cycles 

13.  Measuring   and   Forecasting 

General   Business    Condi- 
tions 

14.  The  Technical  Position  of  the 

Market 

15.  Money  and  Credit 


•6.  The  Essential  Features  of     .^    -r,     ■  -n    £i 

^        .  .  -^16.  Business  Profits 

Securities 


7.  The   Value  of  a  Railroad 

Security 

8.  Industrial  Securities 

9.  Oil  Securities 

10.  Mining  Securities 


17.  Launching  a  New  Enterprise 

18.  Securing  Capital  for  Estab- 

lished Enterprise 

19.  Internal  Financial    Manage- 

ment 

20.  Search  for  Bargains 


Copyright,  1922,  by 
American  Institute  of  Finance 


I 


V 
^ 
^ 


--i 


TABLE  OF  CONTENTS 


( 
'^ 

^  

,^      Chapter  I.     Buying  and  Selling  Zones  Page 

;^               The  Methods  of  a  Seasoned  Veteran 5 

Times  to  Buy  and  Times  to  Sell 6 

[v^                One-Way  Pockets 7 

^                    United  States  Steel 9 

I                     Crucible  Steel 9 

''b                     Baldwin  Locomotive 9 

Studebaker  Corporation 10 

Westinghouse  Electric 10 

N.                  Waves  of  Bullishness  and  Bearishness 10 

Amounts  Bought  and  Sold 12 

Five  Hundred  Accounts  in  Steel  Common 12 

Eyes  to  the  Front 13 


Chapter  II.     Market  Moves 

The  Swing  of  Prices 15 

Three  Types  of  Moves 15 

Dow's  Law 17 

A  Little  Scene  in  the  Broker's  Office 18- 

Perspective 19" 

^      Chapter  III.     Price  Moves  from  the  Inside 

\^  Demand  and  Supply 21 

The  Market  Dynamic  in  Nature 21 

sy\  Board  Room  "Rust" 22 

J  "The  Big  Interests  Are  Buying" 24 

V  Surface  Effects  vs.  Underlying  Causes 24 

^     Cha{)ter  IV.     Twenty  Years  in  the  Slock  Market 

•^^  Broad  View  of  the  Market 26 


V 


^ 


The  Stock  Market  in  Profile 26 

Cycle  1900-1903 28 

Stock  Market  Influences,  1900-1902 28 

Stock  Market  Influences,  1903 30 

Cycle  1904-1908 30 

Stock  Market  Influences,  1904,  1905,  1906 31 

Stock  Market  Influences,  1907 32 

Bull  Market  of  1908-1909 32 

Stock  Market  Influences,  1908-1909 33 


447462 


4  T  able   of   C  ontent  s 

Chapter  IV.  Twenty  Years  in  the  Stock  Market — continued  p.^^,,, 

Reaction  in  1910 33 

Stock  Market  Influences,  1910 34 

Irregularity  1911-1914 34 

Stock  Market  Influences,  1911 35 

Stock  Market  Influences,  1912-1914 36 

War  Boom 37 

Stock  Market  Influences,  1915-1916 37 

America  in  the  War 39 

Stock  Market  Influences,  1917-1919 39 

America  after  the  War 40 

Stock  Market  Influences  1920-1922 41 

What  Next  We  Consider 41 

Chapter  V.     From  Gross  to  Dividends 

A  Study  in  Corporation  Finance .43 

Shares  and  Their  Priority  Claims 44 

Dividends  vs.  Earnings  as  a  Market  Guide 47 

Chapter  VI.     Looking  Ahead 

The  Sinews  of  Wall  Street 51 

Questions  Which  Point  the  Right  Way 51 

The  Profit  Maker's  Point  of  View 52 

The  Commercial  and  Financial  Mainspring 53 

Jay  Gould's  Statement 54 

What's  Ahead? 55 

The  Next  Step 57 

Questions 

Answers  to  Starred  Questions 


CHAPTER  I 

BUYING  ZONES  AND   SELLING   ZONES 

The  thing  to  do  is  to  watch  Wall  Street's  eddies  and  cur- 
rents, exercise  a  little  common  sense,  and  in  your  speculations 
you  ivill  come  out  all  right. 

—  Jay  Gould,  Financier  and  Manipulator. 

The  Methods  of  a  Seasoned  Veteran 

The  attractive,  but  all  too  brief,  advice  given  by  Mr.  Gould 
needs  to  be  supplemented  by  the  suggestions  of  another  well- 
recognized  authority  in  finance,  Mr.  Henry  Clews,  before  the 
problem  here  set  for  solution  is  clearly  mapped  out.  How 
secure  profits  in  the  market?  Mr.  Clews  answers  the  question 
in  this  way: 

"The  old  veterans  of  the  Street  usually  spend  long  intervals 
of  repose  at  their  comfortable  homes,  and  in  times  of  panics, 
which  recur  sometimes  oftener  than  once  a  year,  these  old 
fellows  will  be  seen  in  Wall  Street,  hobbling  down  on  their 
canes  to  their  brokers'  offices. 

"There  they  always  buy  good  stocks  to  the  extent  of  their 
bank  balances,  which  have  been  permitted  to  accumulate  for 
just  such  an  emergency.  The  panic  usually  rages  until  enough 
of  these  cash  purchases  of  stock  are  made  to  aflord  a  big  'rake 
in.'  When  the  panic  has  spent  its  force  and  the  skies  once 
more  are  bright,  these  old  fellows,  who  have  been  resting  ju- 
diciously on  their  oars  in  expectation  of  the  inevitable  event, 
which  usually  returns  with  the  regularity  of  the  seasons,  quickly 
realize,  deposit  their  profits  with  their  bankers,  or  the  surplus 
thereof  after  purchasing  more  real  estate  that  is  on  an  up  grade, 
for  permanent  inv^estment,  and  retire  for  another  season  to  the 


6  F  0 r  ce  s 

quietude  of  their  splendid  homes  and  the  bosoms  of  their  happy 
famihes. 

"Those  who  follow  this  method  always  succeed,"  continues 
Mr.  Clews.  "If  the  venture  is  made  at  the  right  time — at  the 
lucky  moment,  so  to  speak — and  each  successive  venture  is 
fortunate,  as  happens  often  to  those  who  use  their  judgment  in 
the  best  way,  it  is  possible  to  realize  a  net  gain  of  fifty  per  cent 
per  annum  on  the  aggregate  of  the  year's  investments." 


Times  to  Buy  and  Times  to  Sell 

The  extent  to  which  leading  stocks  upon  the  Exchange  rise 
and  fall  in  price  each  year  will  indicate,  if  we  examine  it,  whether 


TABLE    I 
Price  Changes  of  Ten  Leading  Stocks 


1921 

1922                                  1923 

STOCKS 

High 

Low 

Range 

High  1  Low 

Range;  High 

Low    Range 

American  Can 

351^ 

23H 

12 

110 

32M 

77M 

107^ 

73K    341^ 

American  Woolen .  .  . 

83  J.^ 

57 

ley^ 

111 

78M 

32  M 

109% 

65        U% 

Baldwin  Locomotive 

100^^ 

6214 

38^ 

145  H 

93M 

51^ 

144^ 

UOK    i^H 

Baltimore  &  Ohio.  .  . 

mi 

oQ% 

12 

60M 

33M 

26% 

60% 

403^    205^ 

Corn  Prod.   Refining 

99M 

59 

40K 

134M 

91M 

43H 

160H 

114%!   463^ 

Studebaker  

93K 

43^ 

49K 

141M 

791^ 

62% 

126H 

93M|   32H 

The  Texas  Company 

48 

29 

19 

52^ 

42 

10,14 

^2% 

34%    1834 

Union  Pacific 

131K 

HI 

20K 

1543^ 

125 

293^ 

144  J^ 

1243^    20% 

U.  S.  Steel    

86  H 

70M 

16M 

nm 

82 

293^ 

1095^ 

851^    243^ 

Woohvorth    

13934 

105 

U% 

223 

137 

86 

290 

1993^1    9Q-'i 

Average    

$72M     |$27             $102       $45     |      $112^     i$36i^ 

Fluctuation    

37%|                         44%|                         32% 

the  opportunities  to  profit  mentioned  by  Mr.  Clews  do  actually 
exist.  The  accompanying  table  shows  that  during  the  three 
years  examined,  the  ten  prominent  issues  cited  have  fluctuated 
annually  an  average  of  more  than  $36  per  share.  This  represents  a 
change  each  year  of  from  32  to  44  per  cent  of  the  price  of  these 


Buying   and  Selling  Zones  7 

stocks,  a  considerable  range  from  low  point  to  high  point.  Con- 
firming as  it  does  the  observ^ations  of  Air.  Clews,  this  table  shows 
that  each  year  there  are  times  to  buy  and  times  to  sell. 

\'iewing  the  matter  now  from  the  standpoint  of  the  specu- 
lative investor,  and  disregarding  for  the  time  being  the  trader 
and  the  investor,  let  us  recall  from  Text  I  how  the  market 
undergoes  from  period  to  period  changes  in  its  price  le\'cl.  The 
distance  from  the  market's  low  points,  reached  during  panics 
and  periods  of  depression,  and  its  high  points,  touched  when 
prosperity  is  general,  let  us  divide  roughly  into  four  zones,  the 
upper  one  in  which  prices  are  high,  the  bottom  one  in  which 
prices  are  low,  and  the  two  others  in  which  prices  are  mod- 
erate. When  should  you  buy  and  sell?  Lord  Rothschild  ex- 
pressed the  matter  tersely  when,  upon  being  asked  how  he 
had  built  up  his  fortune,  he  said:  "Buy  cheap  and  sell  dear." 
This  matter-of-fact  rule  let  us  apply  to  these  four  zones.  The 
upper  is  the  "sell"  zone;  the  lower  a  "buy"  zone;  and  the  other 
two  "remain  neutral"  zones.  Here  we  have  mapped  out  m 
broad  outline,  rules  of  operations  which  Mr.  (lOuld,  Mr.  Clews, 
Lord  Rothschild,  and  hundreds  of  other  successful  financiers 
for  that  matter,  have  proved  effective. 

The  realness  of  the  zones,  taken  in  connection  with  ihc  table 
just  cited  and  the  figures  presented  in  Chapter  1 1 :  "Opportunity" 
in  Text  I,  represents  a  condition  laden  with  possibilities.  What 
results?  Faced  as  he  is  with  these  opportunities  to  profit,  what 
does  the  average  person  do  with  them? 

One-Way  Pockets 

The  accounts  of  half  a  dozen  men  who  traded  actively  from 
July  1,  1915  to  February  29,  1916,  have  been  studied  by  their 
broker  who  in  revealing  in  his  book,  "One-Way  Pockets."  what 
he  found,  prefers  to  conceal  his  identity  under  the  nom-de-plume 
of  Don  Guyon.  So  closely  do  the  findings,  based  upon  the 
purchases  and  sales  made  through  his  own  brokerage  office,  tall\- 
with  the  results  of  other  investigations  and  <)bser\ations  that 
the  facts  now  to  be  presented  ha\e  decided  \alue. 


8 


F  0  r  c  e  s 


These  traders,  like  a  great  majority  of  his  firm's  customers, 
had  been  bulHsh  on  the  munitions  and  standard  industrial 
stocks,  and  now  that  these  stocks  had  enjoyed  an  advance  of 
from  15  to  100  points  each,  followed  by  a  reaction  of  less  than 
forty  per  cent  of  this  advance,  the  investigation  could  be  expected 
to  disclose  substantial  profits. 


POSSIBLE 
PROFITS 


U  S 
STEEL 

31?8 


CRU- 
CIBLE 

SOTs 


BALD- 
WIN 
90'; 


STUDE- 
BAKER 

118^8 


u 


WESTING. 

HOUSE 

27'/s 


AVER- 
AGE 
0934 


ACTUAL 
LOSSES 


iVg, 


ovs 


iVfe 


3?8 


Figure  1:  "One-Way  Pockets" 

The  results  here  pictured  are  based  upon  transactions  of  46,600  shares,  in  five  stocks 
actively  dealt  in.  Note  the  very  large  possible  profits,  and  what  use  these  traders  had  actually 
made  of  them. 


The  stocks  selected  for  study  —  United  States  Steel,  Crucible, 
Baldwin,  Westinghouse,  and  Studebaker  —  had  all  been  dealt  in 
actively  by  each  of  the  six  traders,  to  the  total  extent  of  46,600 
shares.  The  six  accounts  taken  collectively,  as  though  they 
represented  the  operations  of  one  man,  and  their  results  sum- 
marized, this  is  the  situation  disclosed  (see  Figure  1). 


Buying   and   Selling  Zones  9 

The  following  tables  present  with  some  detail  the  results 
summarized  in  Figure  1.  They  present  the  main  features  with 
respect  to  each  of  the  five  stocks  and  the  actual  price  at  which 
purchases  and  sales  were  made  by  the  traders. 


United  States  Steel 

Opening  price,  July  1,  1915    595^ 

Low  price  for  period    58^ 

High  price  for  period 89  J-^ 

Total  advance 315^ 

Closing  price,  Feb.  29,  1916  825^^ 

Net  advance 23 

Customers'  average  buying  price    81J^ 

Customers'  average  selling  price 80^ 

Average  loss,  less  commissions J^ 


Crucible  Steel 

Opening  price,  July  1,  1915    31/^ 

Low  price  for  period    29 

High  price  for  period 109J^ 

Total  advance 80J^ 

Closing  price,  Feb.  29,  1916  73i<C 

Net  advance -tl  ^ 

Customers'  average  buying  price    855'^ 

Customers'  average  selling  price 79?^ 

Average  loss,  less  commissions 5^^ 


Baldwin  Locomotive 

Opening  price,  July  1,  1915    64 ,'2 

Low  price  for  period    64 

High  price  for  period 154,V^ 

Total  advance 90^^^ 

Closing  price,  Feb.  29,  1916  102 

Net  advance 3S 

Customers'  average  buying  price    IHH 

Customers'  average  selling  price 104 

Average  loss,  less  commissions 7J^ 


10  F  0  r  c  e  s 

Studebaker  Corporation 

Opening  price,  July  1,  1915    76J^ 

Low  price  for  period    763^ 

High  price  for  period 195 

Total  advance 1 18% 

Closing  price,  Feb.  29,  1916  136% 

Net  advance 59% 

Customers'  average  buying  price    138% 

Customers'  average  selling  price 135% 

Average  loss,  less  commissions 3% 

Westinghouse  Electric 

Opening  price,  July  1,  1915    48% 

Low  price  for  period    47% 

High  price  for  period 74% 

Total  advance 27% 

Closing  price,  Feb.  29,  1916   63% 

Net  advance 14% 

Customers'  average  buying  price    62% 

Customers'  average  selling  price 6134 

Average  loss,  less  commissions 1% 

These  tables  present  convincing,  though  no  doubt  some- 
what surprising,  evidence  of  what  the  average  trader  makes  of 
opportunities  to  profit. 

Though  large  gains  had  been  scored  by  these  stocks  during 
the  period  and  the  traders  had  operated,  for  the  most  part,  on 
the  long  side,  the  average  price  at  which  each  stock  was  purchased 
was  higher  than  the  average  price  at  which  it  was  sold.  In  spite 
of  the  exceptional  opportunities  presented  during  this  period, 
these  traders,  owing  to  wrong  methods,  had  lost  money. 

Waves  of  Bullishness  and  Bearishness 

The  glaring  errors  disclosed  b}'  this  study  of  the  six  trading 
accounts  led  Guyon  to  keep  for  a  year  a  daily  record  of  the 
total  number  of  shares  which  his  firm  bought  and  sold.  The 
periods  during  which  customers  were  either  buying  heavily  or 
selling  heavily  were  selected   for  special  analysis,  and  a  table 


Buying   and   Selling  Zones 


11 


prepared  showing  the  total  number  of  shares  both  bought  and 
sold  during  such  time.  From  this  table  we  have  prepared 
Figure  2  which  presents  its  results  graphically.  Periods  in 
which  buying  was  preponderant  are  shown  in  black  and  selling 
balances  are  shown  in  white. 


115 

110 

„105 

•^100 

95 

90 

85 

250 

^200 

o 
u 

ta 

Sl50 

o 

1 100 

3 
O 
M 

H  50 


■    Purchases  Exceeded  Sales 

■ 

D    Saies 

Exceeded  Purchases 

■ 

Im 

A 

rii 

l_r 

>— 

H 

■l    ■    ri 

- 

■ 

■ 

■ 

H--' 

"LP     Lj 

' 

-^ 

_, 

-^- 

1      -n           d] 

IW 

tti 

Figure  2:  When  the  Public  Buys  and  Sells 

This  diagram  reveals  closely  the  public's  habit  of  buyinR  on  bulges  and  selling  on  de- 
clines.    The  columns  at  the  bottom  show  the  extent  of  this  bad  buying  and  bad  selling. 


Periods  when  customers  were  loading  up  with  slocks  were 
followed  in  each  case  by  a  lower  range  of  prices  and,  with  one 
exception,  periods  when  they  sold  were  followed  by  higher  prices. 


12  F 0  r  ce  s 

The  diagram  indicates  this  "bad"  buying  and  "bad"  selling 
very  clearly. 

Amounts  Bought  and  Sold 

There  remains  another  item  of  importance  in  this  investiga- 
tion, which  is  the  relative  amounts  bought  and  sold  at  the  two 
price  levels.  From  the  table  showing  the  total  number  of  shares 
bought  and  sold  the  following  summary  has  been  made: 

Bought  during  advance 883,600  shares 

Sold  during  advance 613,300 

Excess  of  purchases    270,300 

Sold  during  declines 437,000 

Bought  during  declines    366,900 

Excess  of  sales 70,100 

Customers  at  high  prices  bought  more  than  twice  as  many 
shares  as  at  low  prices,  in  other  words,  they  used  big  margins 
when  stocks  were  low  and  small  margins  when  stocks  were  high. 
Having  held  Steel  in  200  or  300  share  lots  at  $60  a  share,  they 
took  on  lots  of  400  to  600  shares  around  $80.  Similarly  with 
Crucible,  Baldwin,  Studebaker,  and  Westinghouse  —  these 
stocks  grew  more  attractive  and  were  held  in  larger  quantity 
as  they  went  up.  The  higher  the  price  the  heavier  the  load, 
roughly  speaking,  describes  the  situation. 

The  market  operator  in  this  situation  is  unsafe.  When  his 
account  is  thus  rendered  top-hea\^^  a  decline  of  ten  points  from 
high  prices  wipes  out  whatever  profits  were  made  on  a  twenty 
point  advance  from  low  prices. 

Five  Hundred  Accounts  in  Steel  Common 

These  results  disclosed  by  Don  Guyon  are  confirmed  by  a 
study  of  500  accounts  in  Steel  common  made  several  years  ago 
by  Thomas  Gibson.  Mr.  Gibson  selected  as  his  period  of  study 
July,  1901,  to  March,  1903,  because  Steel  sold  at  approximately 
the  same  price  at  both  the  beginning  and  close  of  this  period  and 


Buying   and   Selling  Zones  13 

hence  from  a  mathematical  standpoint  the  situation  was  about 
50-50.  Whatever  was  actually  done,  therefore,  that  threw  the 
results  out  of  the  50-50  class  would  be  pretty  clearly  an  index  of 
the  traders  themselves,  their  mental  processes  and  methods  of 
dealing  in  stocks.  The  examination  of  these  five  hundred 
accounts  disclosed  this  as  the  final  outcome. 

What  the  Results  Were 

Total  deficit  on  losing  accounts 81,245,000 

Total  gain  on  profitable  accounts 288,000 

Number  of  shares,  long  stock 820,000 

Number  of  shares,  short  sales 292,000 

Average  price,  long  stock  purchased 425^8 

Average  price,  short  sales 35  ^4 


Eyes  to  the  Front 

The  two  studies,  one  made  by  Mr.  Gibson  sixteen  years  ago 
and  the  other  by  Don  Guyon  in  recent  markets,  indicate  certain 
errors  persistently  made  by  numbers  of  persons  in  the  market. 
Practically  every  well-informed  person  in  Wall  Street  observes 
day  after  day  in  market  after  market  that  such  is  the  case. 
What,  then,  is  the  problem,  vital  to  profits,  which  we  now  face? 

The  realness  of  opportunity  must  be  conceded.  Profits 
in  generous  amount  were,  are,  and  will  be,  possible. 

Attempts  to  take  advantage  of  these  opportunities  were, 
and  are,  clumsily  made.  The  wrong  methods  here  dis- 
closed would  keep  a  man  poor  in  any  line  ot  business. 

Traders  in  their  attempt  to  foresee  price  changes  evi- 
dently look  at  the  wrong  things.  Unlike  the  expert 
ball  player,  golfer,  or  money  maker,  they  do  not  keep 
their  eye  on  the  ball. 

The  conclusion  appears  evident  that  what  the  untrained 
man  tends  to  do  as  a  matter  of  course,  that  is,  what  seems  to 
him  the  obvious  thing  to  do,  does  not  result  in  a  profit.     Keener 


14  Forces 

insight,  a  more  penetrating  view  of  what  causes  price  changes, 
in  brief  a  developed  financial  skill,  are  essential  in  securing  profits. 
And  these  qualifications  the  wise  person  will  cultivate  before, 
rather  than  after,  he  enters  the  market.  This  is  the  problem 
here  set  for  solution. 

In  succeeding  chapters  and  Texts  the  forces  which  make 
prices  are  clearly  analyzed,  thus  enabling  the  subscriber  with 
increased  profit  to  himself,  to  gauge  them  in  advance. 


CHAPTER    II 
MARKET    MO\'ES 

The  Swing  of  Prices 

The  reader  who  turns  to  the  financial  page  of  his  newspaper 
finds  there  a  table  of  figures,  frequently  two  columns  wide, 
which  extends  a  full  page  or  more  in  length.  This  table,  in  part 
only,  is  here  reproduced. 

NEW   YORK  STOCK   EXCHANGE 


TUESDAY,  DEC.  31,  1918 

1918                                 1917  1916 

Day's  sales 933,594                 Holiday  920,961 

Year's  sales 143,378,095             184,536,371  232,342,807 


Closing 
Bid       Ask. 


Sales 


First     High     Low     Last 


Net 
Chge. 


76M 
100^ 
7434 
32 

31M 
44^ 
75 

SlVs 
1291^ 
95 

41^ 
26 


76% 
100% 
75 

32M 
31K 
44^ 
753^ 
51% 
129% 


12,450 
7,300 

11,200 
7,400 

23,600 

16,380 
4,900 
8,400 
6,000 


95^111.000 
41%  11,200 
26%1  10,700 


Am.  Smelt.  &  Ref.  . 
Am.  Tel.  &  Tel.  . .  . 
Baldwin  Locomotive 

Int.  Nickel 

Kennecott  Copper    . 
Pennsylvania  R.  R. 
Rep.  Iron  &  Steel  .  . 

Studebaker  Co 

Union  Pacific 

U.  S.  Steel    

VVestingii.  E.  M.  &  d 
Willys-Overland    . .  . 


75H 
99% 

73H 
32H 
31J^ 
43K 
74% 
50 

129% 
94 
41% 
25 


77 
101 

75^ 
32% 
323^ 
44% 
75% 
51J^ 
130% 
95% 
41% 
26% 


75^ 
99% 

731^ 
31% 
315^ 
43^ 
74 
50 
1285^ 

93H 
40% 
25 


761^ 

100 
74K 
32% 
31% 
44^ 
75% 
51 

129% 
95 

41% 
26% 


+VA 

+  % 
+  1K 

+  'A 
+  Vb 
+1% 
+1 
+1% 
+  % 
+1M 
+1% 


Three  Types  of  Moves 

Those  who  watch  the  ticker  realize  that  the  four  prices  given 
in  the  newspaper's  table,  that  is,  first,  high,  low,  and  last  prices 


16 


Forces 


of  the  day,  reveal  in  only  a  limited  way  the  exceedingly  numerous 
fluctuations  which  occur.  Upon  the  floor  of  the  Exchange, 
market  history  is  written  in  terms  of  eighths  and  quarters  of  a 
point. 

This  fuller  account  of  a  stock's  price  changes  will  now  be 
shown  on  a  diagram,  which  taken  in  connection  with  the  two 


JiiLuary  1,1915  by  Mootba  to  January  1.  1917 


Jauuary  1,  tu  KePruary  l.iaiT 


g¥=E 


^Ld^i=Fa 


86  M 
% 
\ 
H 

8G 

% 
|« 


■ 

Jan 

uary 

14 

1916 

'1 

1 

c 

1 

i 

1 

1 

1 

j 

1 

n 

1 

1 

1      !      1      1 

1         :     1 

1 



Figure  3:  Three  Types  of  Moves  in  Steel  Common 

Daily  fluctuations  are  bullish,   the  secondary  swing  is   bearish, 
while  the  primary  swing  is  bullish. 

other    parts   of   the   figure   presents   a   matter    of   considerable 
importance.      U.   S.    Steel   the   morning  of   January    14,    1916, 

It  advanced  to  f ,  then  f ,  then  |. 


opened   1600  shares  at  85 1. 


Market   Moves  17 

Figure  3  C  presents  every  mo\'e,  or  change  in  price,  which 
occurred  during  that  day. 

The  fluctuations  themselves  were  part  of  a  broader  mo\'e- 
ment  which  is  termed  a  secondary  swing  (see  B  in  Figure  3). 
Steel's  record  for  that  January  14th  session  is  indicated  by  the 
heavier  block  on  the  second  part  of  the  diagram.  Though  Steel 
on  January  14,  was  going  up,  its  move  in  the  secondary  swing 
was  downward. 

This  secondary  swing,  in  turn,  which  in  the  present  instance 
covered  approximately  a  calendar  month,  was  part  of  a  still 
broader  range  of  prices,  termed  a  primary  move  (see  A  in  Figure 
3).  Steel's  secondary  swing,  shown  in  B,  has  in  the  diagram  of 
the  primary  move  been  indicated  by  a  heavier  block.  While 
Steel's  position  in  the  secondary  swing  was  bearish,  its  position 
in  the  primary  swing  was  bullish. 

Studies  of  other  stocks  could  be  made  which  would  show 
moves  very  much  similar  to  these  presented  in  Figure  3. 

Dow's  Law 

The  changes  in  prices  just  cited  have  been  described  by  the 
late  Charles  H.  Dow,  a  founder  of  the  Wall  Street  Journal  and 
a  trader  of  rare  insight,  in  a  way  which  has  since  been  termed 
Dow's  law  of  market  movements.     This  is  his  description : 

"The  course  of  prices  over  a  long  period  of  time  resembles 
the  course  of  a  winding  river  which  doubles  on  itself  again  and 
again,  so  that  in  traveling  from  one  point  to  another,  distant 
perhaps  twenty  miles  in  a  straight  line,  it  will  actually  traverse 
a  distance  of  fifty  or  sixty  miles  in  making  those  twenty,  and 
will  often  travel  for  some  miles  in  a  direction  opposite  to  that 
of  its  ultimate  or  true  course.  Furthermore,  the  course  is  full 
of  eddies  which  keep  the  straws  on  its  surface  twisting  and 
turning  back  and  forth  all  the  time. 

"The  ultimate  or  true  course  of  the  river  is  called  the  primary 
movement  of  prices  and  it  expresses  the  gradual  adjustment  ot 
prices   to  investment   values   resulting   from   the  operations  of 


18  F  0  r  ce  s 

in\estors  —  viz.,  those  who  buy  stocks  for  income  rather  than 
for  speculation.  By  value  is  meant  the  relation  of  the  earning 
capacity  and  dividend  yield  of  a  company's  stock  to  the  general 
value  of  money,  so  measured  by  interest  rates.  The  secondary 
movements  or  swings  are  likened  to  the  river's  doublings  and 
twistings,  and  are  due  mainly  to  the  operations  of  margin  specu- 
lators. The  surface  eddies  are  the  daily  fluctuations  which 
reflect  mainly  the  activities  of  the  floor  traders  who  operate  in 
the  Exchange.  Sometimes  the  surface  eddy  doubled  on  the 
actual  flow  of  the  current,  and  sometimes  the  actual  flow  of  the 
current  doubled  on  the  river's  true  course.  Traders'  operations 
are  always  intimately  correlated  to  and  interwoven  with  those 
of  the  margin  speculators  and  those  of  the  margin  speculators 
with  those  of  the  investor,  the  whole  forming  the  continuous 
current  of  the  river." 


A  Little  Scene  in  the  Broker's  Office 

What  connection  has  this  study  of  moves  with  the  average 
trader's  wrong  methods  shown  in  Figure  2,  and  with  a  person's 
own  plans  to  deal  profitably  in  securities?  The  answer  to  this 
question  can  be  presented  with  some  little  realism  in  the  follow- 
ing instance,  the  like  of  which  occurs  in  many  a  broker's 
office. 

Assume  that  January  14th,  when  U.  S.  Steel  was  fluctuating 
around  85|,  Mr.  Average  Man  had  dropped  into  his  broker's 
office  "just  to  see  how  the  market  opens."  Stocks  are  firm. 
Steel  appears  upon  the  tape—  1600:  85|,  1000:  85|,  2200:  85f. 

"Steel  looks  good  this  morning,"  suggests  the  customers' 
man. 

"There's  one  thing  you  can  depend  upon,"  sagely  observes 
a  graybeard  seated  for  the  day  near  the  ticker.  "Those  who 
sold  their  stocks  on  news  of  this  Mexican  situation  will  have  to 
climb  for  them  in  a  few  days.  That's  certain."  He  was  com- 
fortably long  of  stocks. 

Steel  appears  upon  the  tape:  85|  —  a  half-point  up  already 
from  last  night's  close.     "Buy  me  a  100  Steel  at  |  quick,"  says 


Market   Moves  19 

Mr.  Average  Man.  He  gets  it  at  f  much  to  his  surprise  and 
when  a  few  minutes  later  it  touches  \  a  chilly  feeling  creeps  over 
him.  His  confidence  revives  as  Steel  from  that  point  mounts 
again,  and  when  in  due  time  it  touches  86  he  leaves  the  office 
quite  satisfied  with  himself. 

Why  did  he  purchase  Steel? 

Was  it  for  a  turn  of  a  point  or  two? 

Or  because  he  believed  a  secondary  swing  upward  was  taking 
place? 

Or  was  he  thinking  ahead  in  terms  of  the  long  pull? 

The  diagram  shows  full  well  the  dangers  ahead  for  the  man 
who  merely  bought,  without  having  in  mind  a  clear  idea  of  why. 

Perspective 

The  chances  are  fifty  to  one  that  the  average  man  in  Wall 
Street  under  circumstances  such  as  have  been  stated  thinks  only 
"Steel  is  going  up."  No  doubt  at  the  time  Steel  is  going  up. 
But  what  sort  of  a  move  is  on?  Is  this  the  sort  of  move  that 
fits  into  his  trading,  or  speculative  investment,  or  investment 
plan?  These  are  questions  which  this  average  man  ought  to 
think  over  before  he  puts  in  his  order,  although  as  a  rule  it  is 
after,  if  at  all,  that  he  giv^es  them  serious  consideration.  Con- 
sequently he  lacks  perspective,  buys  or  sells  without  foresight, 
flounders,  and  commits  the  stupid  blunders  which  work  such 
havoc  with  his  profit  and  loss  record.  These  errors  are  all  the 
more  irritating  because  in  large  part  so  unnecessary. 

The  stock  market  with  respect  to  its  moves  is  a  sort  of  wheel 
within  wheel  affair  composed  of  an  outer  rim  which  mo\es  with 
broad  regularity,  inner  gears  which  upon  occasion  run  in  re\'erse 
direction,  and  in  the  center  a  small,  active  balance  wheel  which 
continuously  turns  this  way  and  that.  Tr\-ing  to  watch  all 
these  wheels  at  the  same  time,  without  noticing  how  dilTcrent 
are  their  respective  mo\'emcnts,  will  likely  lea\'e  a  person  dizzy 
—  in  prime  condition  to  commit  the  errors  cited  in  the  pre- 
ceding chapter.  But  tlu>  knowledge  that  market  mo\os  consist 
of  three  classes  and  that  while  these  three  ma>'  pn^ceed  together 


20  Forces 

they  very  commonly  go  in  opposite  directions,  provides  those 
interested  in  the  market  a  distinctly  useful  point  of  view.  It 
simplifies  their  problem  and  renders  it  more  definite.  With 
this  simplified  and  more  definite  problem  in  mind,  you  can  the 
better  keep  your  eye  upon  the  particular  forces  which,  in  what- 
ever of  these  three  kinds  of  moves  has  been  selected,  there 
operate  to  make  prices. 

But  what  constitute  the  market  forces  themselves?  Where 
can  they  be  located?  These  are  also  essential  questions,  to 
whose  answer  several  chapters  will  now  be  devoted. 


CHAPTER   III 
PRICE   MOVES   FROM   THE    INSIDE 

Demand  and  Supply 

"Why  do  prices  go  up  or  down?"  The  question  was  put  by 
a  customer  to  his  broker,  a  man  of  long  experience  in  whom 
age  evidently  had  bred  conservatism. 

"Prices  of  stocks  go  up,"  the  broker  declared  after  a  due 
pause,  "when  there  are  more  buyers  than  sellers  at  a  given  price 
level,  and  go  down  when  there  are  more  sellers  than  buyers." 

Demand  and  supply,  in  other  words,  was  the  idea  he  intended 
to  convey  by  this  apparently  safe  platitude  —  which  incidentally^ 
in  the  way  he  stated  it,  was  inaccurate. 

It  is  true,  of  course,  that  the  conditions  of  demand  and 
supply  change  continuously,  which  in  turn  brings  about  bids, 
and  offers  at  new  levels,  either  higher  or  lower;  but  this  con- 
ception, while  of  some  use,  does  not  really  explain  very  much. 
We  must  get  behind  demand  and  supply  merely  as  terms,  to- 
the  forces,  which,  by  creating  new  conditions  in  the  minds  of 
buyers  and  sellers,  make  the  market  price. 

The  Market  Dynamic  in  Nature 

What  we  wish  to  convey  by  the  above  statements  is  that 
price  making  is  always  a  dynamic  process,  in  which  buyers  press 
for  lower  terms  and  sellers  seek  for  higher.  Consequently, 
markets  are  in  a  state  of  i\ux,  with  quotations  always  in  process 
of  change. 

It  is  the  tendency  of  human  nature,  however,  to  think  in 
static  terms,  which  means  nothing  more  than  that  people  readily 
form  habits  which  it  requires  effort  on  their  part  to  break  and 
that  in  consequence  they  are  inclined  to  believe  existing  conditions 
will  continue  as  they  are. 


22  F  o  r  c  e  s 

When  the  market  is  dull  and  depressed,  those  interested  in 
stocks  find  it  hard  to  see  in  such  conditions  the  prelude  to  a 
period  of  activity  and  higher  prices.  When  prices  are  near  the 
top  and  the  reports  on  all  sides  say  the  country  was  never  before 
so  prosperous,  they  assume  confidently  that,  while  other  booms 
have  not  lasted,  this  one,  due  to  circumstances  unlike  those  of 
preceding  booms,  is  here  to  stay. 

This  conflict  between  dynamic  markets  and  static  mental 
tendencies  has  worsted  more  followers  of  the  Exchange  than  a  few. 


Board  Room  "Rust" 

These  static  mental  tendencies  usually  grip  closely  the  person 
whom  those  at  a  distance  from  the  market  are  in  the  habit  of 
envying  on  account  of  what  they  consider  his  exceptional  ad- 
vantages, viz.  the  office  habitue.  Very  commonly  this  daily 
scanner  of  ticker  tape  and  board  is  found  seated  listlessly  before 
the  latter,  a  blase  individual  who  watches  the  hurrying  board 
boy  change  the  quotations  here  and  there. 

What  do  these  quotations  mean  to  him?  The  United  States 
Steel  Corporation  has  long  since  shriveled  into  a  mere  bit  of 
cardboard,  size  2x4.  Its  belching  furnaces,  ore  docks,  thousands 
of  employes,  wonderful  new  plants,  taxes,  unfilled  orders  or  net 
profits  do  not  disturb  his  thought  because,  the  victim  of  what 
has  been  very  well  termed  board  room  "rust,"  his  mind  has 
become  too  warped  to  admit  them.  Union  Pacific  with  its  mag- 
nificent roadbeds  and  low  costs  per  ton  mile,  Anaconda  with  its 
chain  of  mines  and  smelters,  International  Mercantile  Marine 
with  its  famous  liners,  and  Bethlehem  Steel,  the  child  of  Schwab's 
brain  —  it  is  all  the  same ;  shorn  of  every  feature  of  their 
real  selves,  these  great  properties  are  to  him  but  automa- 
tons condemned  for  five  hours  daily  to  strut  upon  the  market 
stage. 

The  account  of  price  changes  which  these  board  room 
"rusters,"  behind  clouds  of  smoke,  pass  freely  among  themselves 
are  quite  in  keeping. 


Price    Moves    fro  m    the    I  u  s  i  d  e 


U 


S     -    ..     M 


5     3 


9.   '-I 

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a  £  "" 


—    1  "5  '?  ? 


^    '£4^  i 


(f)     5 


bo 


—     M 
ill 

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2-  S. 


c;  j2  .2 


rt    u  

op      .  = 

U      <     CO     cd 

j:  -r  ^  o 
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^    1/    u 

£i  S  t;  -S 
5  o-°  .a 
a"  ^  -3 

!  i  ^1 


24  F  o  r  c  e  s 

"I  hear  they  are  going  to  put  up  Corn  this  time  for  sure." 
"Can  is  tipped  up  for  a  rise." 

"Insiders  are  picking  up  Reading  on  every  decHne." 
"Lipper  bought  7,000  Steel;  Pynchon  is  selling  Crucible." 
"I  have  it  straight  that  the  back  dividends  on  Marine  will 
be  cleared  away  at  this  week's  meeting" — ^which  being  inter- 
preted likely  means  that  a  good  friend  of  his  knows  a  man  whose 
father-in-law  had  it  from  the  assistant  to  one  of  the  directors  to 
"watch  Marine,  there's  going  to  be  something  doing  in  it!" 

"The  Big  Interests  Are  Buying" 

The  inexperienced  trader  is,  in  fact,  hard  put  to  it  for  e.x- 
planations  of  what  is  taking  place.  When  the  market  sells  olif 
on  good  news,  advances  on  bad  news  or  breaks  out  of  its  rut 
into  sudden  strength  or  weakness  without  any  cause,  so  far  as 
he  can  tell,  he  becomes  pretty  well  tangled  in  his  thinking. 
Since  an  explanation  he  must  have,  he  discovers  a  mysterious 
"they"  who  control  the  m.arket;  prices  go  off  because  "they" 
put  them  down;  prices  advance  if  "they"  put  them  up. 

With  increasing  experience,  this  trader  after  a  time  has 
rendered  his  "they"  somewhat  more  definite  in  the  person  of 
some  powerful  operator  or  operators.  Years  since  when  the 
market  went  up,  Commodore  \"anderbilt  was  declared  to  be  the 
buyer;  when  it  went  down  Daniel  Drew  was  the  seller.  Later, 
the  name  Jay  Gould  w^as  breathed  every  time  a  market  move 
needed  explanation.  Still  later  it  was  E.  H.  Harriman,  then 
Daniel  G.  Reid,  more  recently  still  Charles  Schwab  or  the  Gary- 
Morgan  "crowd"  or  Jesse  Livermore.  In  cases  of  doubt  "the 
big  interests"  are  made  to  do  service. 

Had  these  operators  actually  put  through  all  the  transactions 
with  which  they  were  credited,  the  Bank  of  England  could  not 
have  financed  them  nor  the  big  Exchange  room  itself  hold  all 
their  securities. 

Surface  Effects  vs.  Underlying  Causes 

What  has  been  said  indicates  pretty  clearly  that  the  majority 
of  persons  interested  in  the  stock  market  keep  their  eye  upon  the 


Price   M  ov  e  s  f  r  0  m   the   Inside  25 

surface  effects,  instead  of  underlying  causes.  They  often  thereby 
are  captivated  and  dazzled  and  bewildered — but  seldom  profited. 

The  statement  of  the  problem  indicates  the  method  for  its 
correct  solution.  "They"  as  an  ail-sufficient  explanation,  needs 
to  be  supplemented  by  the  willingness  to  search  for  causes; 
over-worked  remarks  about  what  "the  big  interests"  are  doing 
should  give  way  to  the  idea  of  market  forces.  One  must  get 
behind  the  quotations  to  the  forces  which  make  them. 

The  Exchange  floor  ought  to  be  regarded  simply  for  what  it 
is,  the  scene  of  incessant  struggles  between  bulls  and  bears  or 
in  other  words,  between  forces  which  make  for  higher  prices  and 
forces  which  make  for  lower.  It  may  be  the  tussle  is  temporarily 
a  deadlock  which,  when  broken  after  a  time,  results  in  a  lively 
day  on  the  Exchange,  a  two-million  or  so  turnover  with  pos- 
sibly three  points  average  advance  or  decline.  Then  a  period 
of  quiesence  may  ensue,  a  sort  of  lull  between  storms.  How- 
ever long  particular  conditions  exist,  forces  as  they  wax  or  wane, 
make  the  market. 

The  study  of  these  forces  supplies  the  essential  foundation 
upon  which  success  in  the  market,  year  after  year,  depends. 

Persons  interested  in  the  market  ma>'  very  well  regard  such 
study  as  constituting  the  alphabet  of  their  business;  and  those 
who,  in  their  present  preoccupation  with  tips,  "inside"  infor- 
mation, the  news,  etc.,  have  not  yet  appreciated  its  value  are 
deceiving  themselves  with  Wall  Street's  skillful  camouflage. 
With  respect  to  our  own  operations,  whether  these  be  in\-est- 
ment,  speculation,  speculati\e  iinestment,  or  the  tiiiancing  of 
enterprises,  are  we  read>'  to  pierce  through  this  surtace  cam- 
ouflage and  act  upon  sound  conclusions? 

Every  niovement  in  i)rices  is  due  to  certain  forces. 

The  presence  of  these  forces  should  not  be  denied  simply 
because  you  do  not  see  them. 

Neither  tips,  nor  a  \'ague  sense  of  wontler.  nor  idle  gossip 
should  prevent  you  from  seeking  out  these  torce^  which  make 
the  market. 

These  forces,  once  recognized  and  the  manner  of  their  opera- 
tion learned,  rendi'r  \<)u  a  real  insider,  one  iclio  knoics. 


CHAPTER   IV 
TWENTY   YEARS    IN   THE   STOCK   MARKET 

Broad  View  of  the  Market 

Those  who  want  to  lay  a  solid  foundation  upon  which  they 
later  can  deal  with  success,  realize  the  importance  of  gaining  at 
the  outset  a  broad  view  of  the  market.  This  broad  view  enables 
them  to  see  how  the  market's  forces  operate  in  setting  prices; 
and  because  several  years'  operations  upon  the  Exchange  are 
surveyed,  it  provides  them  a  sound  perspective.  Having 
acquired  perspective,  the  average  person,  with  whom  inexperi- 
ence is  a  serious  drawback,  is  in  a  position  to  derive  a  decided 
gain;  while  he  cannot  buy  and  sell  in  these  markets  of  the  past, 
he  can  study  them  and,  his  experience  in  this  v.'ay  much  ex- 
panded, enter  the  present  market  with  surer  touch. 

For  this  purpose,  that  the  reader  acquire  market  perspective 
and  see  what  forces  have  operated  to  produce  price  changes  in 
the  past,  we  have  summarized  within  a  few  pages  the  events  of 
twenty  years.  Needless  to  say,  the  account  which  follows  is 
much  condensed;  the  limits  of  space  are  such  that  countless 
details  have  been  stripped  away  and  only  the  broad  outlines 
presented. 

The  Stock  Market  in  Profile 

The  broad  outlines  of  market  history  let  us  picture  first 
graphically.  For  this  purpose  a  considerable  number  of  repre- 
sentative stocks,  both  rails  and  industrials,  have  been  averaged 
in  price  and  these  averages  in  turn  plotted  on  graph  paper. 
Figure  5  accordingly  shows  the  main  swings  of  the  market. 

A  preliminary  survey  of  this  chart  shows  that  stock-market 


Twenty    Years   in   the  Stock    Market    27 

prices  tend  to  move  in  cycles  with  minor  fluctuations  during  the 
big  upswings  and  downturns  of  each  cycle. 

The  first  cycle  began  in  1900  and  ended  in  1903.  The 
upswing  lasted  two  years  and  the  decline  about  twelve  months. 
The  principal  irregularities  were  a  minor  reaction  in  1901  during 
the  upward  movement  and  a  tcmporar\'  ralK'  in  Januar\-,  1903 
after  the  decline  had  set  in. 


1:  Ul      Wl  IW.   1!)U.(  I'.IUI    VMl'  I'JUU    1!)U;   I'JUS   I'JU'J   lUlO  I'Jll    I'll.'   l'J13  I'JH   I'JlJ  I'JIO  I'Jl"   !J13  lUl'J 


Figure  5:  The  Stock  Market  in  Profile 

The  market's  broad  swings  since  the  first  of  January,  1900,  are  here  shown  graphically. 
Dow-Jones  averages  were  used  previous  to  the  closing  of  tlie  Exchange  in  1914,  and  the  New 
York  Times  averages  since. 


The  important  question  for  the  investor  is  to  know  what 
were  the  underlying  influences  causing  prices  to  advance  two 
years  and  decline  twelve  months,  for  the  big  opportunities  for 
accumulating  profits  cited  at  the  beginning  of  this  present  Text 
lie  in  taking  advantage  of  the  long-pull  moves  of  the  cycle.  Let 
us  then  study  this  cycle  of  1900-1903  and  attempt  to  separate 
the  chaff  from  the  wheat.     B\'  chaff  wc  mean  the  factors  which 


28 


F  0  r  c  e  s 


cause  only  the  ripples  which   appear  on    the    general    tide    of 
prices. 


Cycle  1900-1903 

The  factors  of  primary  importance  during  this  cycle  in  de- 
termining the  trend  of  prices  are  grouped  below,  classified  into 
two  groups  —  favorable  or  unfavorable.  Let  us  first  note  that 
the  ad\ance  during  the  two  years  1900-1902  amounted  to  about 
$50  in  the  railway  shares  on  the  average  and  about  $20  in  the 
industrials.  The  important  factors  which  influenced  Wall 
Street  during  these  two  years  were  as  follows: 


Stock  Market  Influences,  1900-1902 


Favorable  Factors 

1.  Large  exports  of  Boer  War. 
This  meant  profits  to  American  ex- 
porters and  easy  money  conditions 
in  Wall  Street  so  long  as  Europe  sent 
gold  in  payment  for  American  mer- 
chandise. 

2.  The  adoption  of  the  gold 
standard  by  Congress  in  1900,  defi- 
nitely removing  the  uncertainty 
which  had  prevailed  while  Mr. 
Bryan  was  engaged  in  his  free  silver 
campaigns. 

3.  The  formation  of  large  corpor- 
ate combinations,  such  as  the  United 
States  Steel  Corporation  and  also  rail- 
way mergers  bringing  vast  railway 
mileage  under  Wall  Street  control. 

4.  The  rapid  increase  in  the  gold 
production  in  the  Klondike  and 
South  Africa,  which  provided  the 
banks  with  abundant  reserves. 

5.  The  struggle  for  control  of 
Northern  Pacific,  causing  the  stock 
to  go  to  $1,000  per  share. 

6.  Good  crops,  except  a  short 
corn  crop  in  1901. 


Unfavorable  Factors 

1.  Bryan's  nomination  in  1900. 

2.  Strikes  at  the  steel  mills  and 
anthracite  coal  mines. 

3.  Drouth  in  1901  affecting  the 
crops,  especially  corn. 

4.  The  Galveston  flood. 

5.  The  assassination  of  President 
McKinley. 

6.  The  Boxer  troubles  in  China. 

7.  The  panic  among  investors 
after  J\Iay  9,  1901,  when  the  North- 
ern Pacific  corner  collapsed. 

8.  Disappointment  regarding 
earnings  of  industrial  combinations 
in  1902,  causing  dividend  reductions. 

9.  Failure  of  attempt  to  peg 
copper  prices  at  end  of  1901. 

10.  Beginning  of  Northern  Secu- 
rities suit  to  stop  railway  mergers  in 
1902. 

11.  Ending  of  the  Boer  War  in 
1902,  meaning  a  loss  of  export  trade 
and  necessity  of  exporting  gold  to 
Europe. 


Twenty    Years   in   the   Stock    Market    29 

The  lesson  to  be  drawn  from  above  table  of  events  is  that 
the  business  world  is  complex.  The  inexperienced  investor  is 
likely  to  imagine  that  a  single  factor  upon  which  he  has  his 
eye  will  prove  the  dominating  influence.  He  is  not  able  to 
balance  all  of  the  factors  in  the  situation  and  judge  correctly 
which  factors  will  prove  to  dominate  the  market.  For  instance, 
the  assassination  of  President  McKinley  or  the  Galveston 
flood  occupied  so  much  space  in  the  newspapers  temporarily 
that  untrained  investors  in  many  cases  doubtless  forgot  such 
fundamental  considerations  as  the  volume  of  business  arising 
froni  the  export  trade  during  the  Boer  War,  the  crops,  and  the 
vigorous  and  efficient  efforts  of  nearly  one  hundred  millions  of 
people  to  produce  profits  from  the  internal  developnient  of  the 
United  States. 

Upon  sober  reflection,  of  course,  it  is  e\ident  that  the  wealth 
destroyed  by  the  Galveston  flood  could  have  little  influence  upon 
the  profits  of  a  majority  of  business  enterprises,  and  that  the 
assassination  of  President  McKinley  would  not  interfere  with 
the  transportation  of  merchandise  or  the  manufacture  of  steel. 
Labor  troubles,  also,  could  not  impair  profits  greatly  unless 
they  resulted  in  a  complete  stoppage  of  business  for  many 
months,  but  experience  shows  that  the  necessity  of  earning  a 
living  forces  capital  and  labor  to  get  together  in  some  fashion 
without  a  long  stoppage  of  industry. 

But  the  question  remains.  "What  caused  prices  to  advance 
during  1900-1902?"  The  fact  that  they  did  advance  show^s  that 
the  favorable  factors  more  than  offset  the  unfavorable  influences. 
The  most  fundamental  factors  were  the  easy  money  rates  in 
Wall  Street  during  1900-1901,  the  export  demand  for  American 
goods,  and  the  fact,  also,  that  selling  prices  generalK'  adxanced 
faster  than  wages  during  these  years,  resulting  in  abnornialK- 
large  commercial  profits. 

Let  us  now  consider  the  events  which  caused  the  markt'd 
decline  in  1903. 


30  Forces 

Stock  Market  Influences,  1903 

Favorable  Factors  Unfavorable  Factors 

1.  Fair  crops.  1.  Large    gold    exports,    causing 

2.  Active  merchandising.  tight  money  in  Wall  Street. 

3.  Fairly  settled  social  condi-  2.  Congestion  of  unsalable  se- 
tions.  curities  in  Wall  Street,  when  banking 

funds  were  depleted. 

3.  Decision  in  Northern  Securi- 
ties case  unfavorable  to  Wall  Street 
control  of  railways. 

4.  Receivership  for  shipping  com- 
bination. 

5.  Labor  troubles. 

6.  Depression  in  steel  industry. 

The  dominating  factors  in  the  dechne  of  1903  were  the  tight 
money  situation  arising  from  gold  exports,  which  checked  lend- 
ing on  securities,  and  the  decision  in  the  Northern  Securities 
case,  which  affected  market  sentiment  and  made  investors  lose 
faith  in  the  ability  of  Wall  Street  financiers  to  maintain  values 
created  through  high  finance. 


Cycle  1904-1908 

Let  us  now  consider  the  cycle  1904-1908.  This  cycle  like 
the  preceding  one  exhibits  an  advance  of  about  two  years  and 
a  decline  of  about  twelve  months.  From  the  autumn  of  1904 
until  the  autumn  of  1906  there  was  an  advance  of  about  $40  per 
share  in  railroad  stocks  and  an  increase  of  about  $55  per  share  in 
the  industrials. 

The  market  did  not  advance  during  the  first  half  of  1904  on 
account  of  a  poor  winter  wheat  crop  and  the  outbreak  of  the 
Russo-Japanese  War.  Before  the  end  of  the  year,  however,  it 
was  found  that  other  crops  were  good  and  that  the  sale  of 
supplies  to  Japan  would  add  to  the  prosperity  of  many  corpora- 
tions. By  the  summer  of  1904,  also,  capital  had  become  ex- 
tremely abundant  in  Europe  and  the  L^nited  States. 

Among  the  more  important  factors  which  entered  into  Wall 


Twenty    Years   in    the  Stock    Market    31 

Street  discussion  during  the  two-year  ad\-ance  of  this  c\cle  were 
the  following: 


Stock  Market  Influences 

Favorable  Factors 
1904 

1.  Government  states  the 
Northern  Security  decision  does  not 
mean  that  the  Attorney  General  is 
"running  amuck." 

2.  Exportation  of  gold  subsides; 
money  becomes  easy. 

3.  Democrats  nominate  Alton 
B.  Parker;  Roosevelt's  election  as- 
sured. 

4.  Good  corn  crop. 

5.  Exports  to  Japan. 

1905 

6.  Iron  market  advances. 

7.  Railways  order  equipment. 

8.  Rumors  of  combinations. 

9.  Dividends  increased,  notably 
on  Steel  Common,  Union  Pacific, 
Southern  Pacific  and  Pennsylvania. 

1906 

10.  Large  crops;  railway  traffic 
heavy. 


Unfavorable  Factors 


1904 


1.  Poor  winter  wheat. 

2.  Financial  uncertainty  upon 
outbreak  of  Russo-Japanese  War. 

3.  Russia  and  Japan  sign  treaty 
in  autumn  1905. 

4.  In  December,  1905,  money 
market  tight  in  sympathy  with 
European  prices;  call  money  rates 
125  per  cent. 

1906 

5.  Hepburn  railway  rate  bill 
enacted.'  Congress  becomes  gener- 
ally hostile  to  corporations. 

6.  San  Francisco  earthquake 
causes  insurance  companies  to  sell 
bonds  to  secure  indemnity  funds. 

7.  Capital  scarce  in  Europe, 
Bank  of  England  rate  6  per  cent. 


By  the  end  of  1906,  the  fiivorablc  influence  of  large  crops  and 
extraordinary  business  profits  was  fully  offset  h\-  the  unfa\oral)le 
effect  of  high  interest  rates,  reflecting  an  rxhaustion  of  cai^ilal. 
The  world  over,  there  were  symptoms  of  a  crisis.  In  Japan, 
Chile,  Egypt,  London,  New  York,  and,  in  fact,  in  all  parts  of 
the  world  high  prices  had  caused  such  an  extension  of  bank  loans 
that  the  bankers  could  little  afford  to  risk  further  assistance  to 
commercial  expansion.  Borrowers  were  making  hea\y  with- 
drawals of  gold  from  the  banks  in  order  to  pa\  the  debts  con- 
tracted on  the  basis  of  high  prices.  The  bankers  began  to 
discriminate  against  stock  exchange  borrowers  in  order  to  assist 


32 


F  0  r  c  e  s 


merchants  to  carry  on  their  operations.  The  result  was  a  slump 
on  the  stock  exchange  late  in  1906,  which  continued  in  1907 
until  November,  except  for  an  occasional  rally  of  a  few  points  in 
the  spring  and  in  July.  Railroad  stocks  declined  fully  $50  a 
share  and  industrials  nearly  as  much. 

At  the  time,  a  good  many  speculators  thought  the  decline 
was  due  mainly  to  the  hostility  of  President  Roosevelt  and 
Congress  toward  corporations,  but  even  though  this  may  have 
dampened  market  sentiment,  the  fundamental  cause  was  an 
exhaustion  of  capital.  Among  the  factors  prominent  as  market 
forces  during  this  memorable  year  of  1907  were  the  following: 


Stock  Market  Influences,  1907 


Favorable  Factors 

1.  Trade  supported  by  large 
crops  of  1906  and  good  corn  crop  of 
1907. 


Unfavorable  Factors 

1.  Abnormally  high  operating 
expenses  impair  profits. 

2.  Commerce  Commission  in- 
vestigates Harriman  railway  lines. 

3.  Bond  syndicates  unable  to 
sell  new  security  issues  because  of 
exhaustion  of  capital. 

4.  Continuation  of  trust  prose- 
cutions. 

5.  State  authorities  active  in 
regulating  railways;  clash  with  Fed- 
eral authorities. 

6.  Judge  Landis  fines  Standard 
Oil  §29,000,000. 

7.  Copper  trade  slumps. 

8.  Knickerbocker  Trust  Com- 
pany fails. 


Bull  Market  of  1908-1909 

After  the  panic  had  passed,  it  was  found  that  the  properties 
built  up  during  the  preceding  period  of  prosperity  were  physically' 
intact;  that  in  1908  the  crops  were  growing  as  usual,  and  that  as 
a  result  of  the  crisis  wages  were  low  and  materials  cheap.  Owing 
to  the  general  halt  of  business  during  the  latter  part  of  1907  and 


Twenty    Years   in   the   Stock    Market    3>i 

the  early  part  of  1908,  capital  rapidly  accumulated,  not  onl\'  in 
the  United  States  but  in  England  and  on  the  Continent. 

By  the  summer  of  1908  conditions  were  ripe  for  an  advance, 
and  during  1908-1909  stock  price  fully  reco\ered  the  losses  of 
the  preceding  panic.  Rails  ad\anced  S50  a  share  and  indus- 
trials nearly  as  much. 

The  following  were  prominent  market  influences: 

Stock  Market  Influences,  1908-1909 

Favorable  Factors  Unfavorable  Factors 

1.  Low    wages    and    cheap    ma-  1.  Railroad  receiverships, 
terials.                                                                      2.  Anti-trust    suit    against    Xew 

2.  Accumulation  of  capital  caus-       Haven  road. 

ing  decline  in  money  rates.  3.   President    Taft     recommends 

3.  Freight  rates  increased.  tax  on  corporation  incomes. 

4.  Increase  in  tariff  duties  in  4.  Harriman,  leading  market 
1909  considered  favorable.                           general,  becomes  ill. 

5.  Expansion  in  iron  and  steel  5.  Europe  begins  to  resell  Ameri- 
industrj-.                                                       can   stocks  bought   during  panic  of 

1907. 

Reaction  in  1910 

At  the  beginning  of  1910  speculators  in  Wall  Street  were 
wvy  much  confused.  Capital  was  still  fairly  plentiful  in 
London  and  Paris  and  the  railroad  promoters  in  the  I'nited 
States  who  were  accustomed  to  borrow  heavily  in  Europe  had 
big  plans  for  the  future.  Nevertheless,  the  chart  on  page  27 
shows  that  stocks  declined  about  S25  a  share  on  the  a\erage 
during  the  first  seven  months  of  1910. 

The  Interstate  Commerce  Commission  rendered  a  decision, 
the  tendency  of  which  was  to  undermine  confidence  in  railway 
securities,  and  for  \arious  reasons  investors  in  England  and 
Holland  sold  back  American  securities  which  they  had  pur- 
chased during  the  panic  of  1907.  It  is  estimated  that  this  re- 
selling from  Europe  amounted  to  ;?150,000,(H)0.  The  reason 
for  such  selling  was  partly  the  restrictive  political  acts  at  Wash- 
ington regarding  the  railways  and  partly  the  fact  that  European 
investors  began  to  find  attractive  investment  opportunities  in 


34  Forces 

other  parts  of  the  world  at  this  time.  An  important  consider- 
ation, also,  was  that  they  had  bought  stocks  during  the  panic 
because  they  were  cheap  and  in  anticipation  of  making  a  profit, 
and  the  wild  ball  market  in  Wall  Street  in  1909  gave  them  the 
expected  opportunity  to  sell  at  a  big  profit.  That  is,  they  sold 
because  prices  were  high. 

The  following  table  summarizes  the  events  considered  im- 
portant market  influences  during  this  year. 

Stock  Market  Influences,  1910 

Favorable  Factors  Unfavorable  Factors 

1.  Fair  crops.  1.  President     Taft     recommends 

2.  President's  annual  message  in  increased  powers  for  Commerce  Corn- 
December  reassuring.  mission. 

2.  Collapse  of  Hocking  Coal  and 
Iron  Pool. 

3.  Anti-Trust  agitation. 

4.  Money  situation  tightens. 

5.  Commerce  Commission  makes 
sweeping  reductions  of  railway  rates. 

Irregularity  1911-1914 

The  three  years  following  1910  were  unfavorable  to  the 
■development  of  a  normal  stock-market  cycle. 

In  1911  and  again  in  1912  speculators  courageously  ad- 
vanced prices,  but  in  each  year  the  bull  movement  collapsed. 
In  July  and  August,  1911,  speculators  were  thrown  into  con- 
fusion. They  would  talk  about  the  short  corn  crop  one  day 
and  the  prosecution  of  the  steel  trust  the  next  day  as  a  cause  of 
the  market's  weakness.  The  fact  was,  however,  that  the  un- 
settlement  of  the  financial  markets  in  Europe  caused  by  the 
Moroccan  dispute  was  the  dominating  influence.  The  Kaiser 
threatened  to  employ  violence  in  dealing  with  France,  and  Lloyd 
George  intimated  that  any  move  against  France  would  prejudice 
British  interests  in  Africa  and  that  Great  Britain  might  be  ex- 
pected  to   take  a  hand   in   any  war    that    de\eloped.     Many 


Twenty    Years   in    the   Stock    Market    35 

bankers  withdrew  funds  from  Switzerland  and  Berlin,  and 
British  speculators  sold  stocks  heavily  in  Wall  Street.  This 
fact  now  has  come  to  be  regarded  as  the  dominating  influence, 
although  at  the  time  Wall  Street  actually  thought  other  con- 
siderations were  more  important. 

The  following  table  shows  the  market  factors  which  governed 
Wall  Street  activities  during  1911: 

Stock  Market  Influences,  1911 

Favorable  Factors  Unfavorable  Factors 

1.  Easy  money  conditions.  1.  Commerce    Commission    sus- 

2.  Supreme      Court      announces       Pends  rate  increases. 

"rule  of  reason"  in  dissolving  Stand-  2.   New    York    Central    reduces 

ard     Oil     and     American     Tobacco  div-idends. 

trusts.  3.  Standard    Oil    and    .\mcrican 

3.  Orders   for   steel    increase   to-  Tobacco  dissolved. 

ward  end  of  the  year.  4.  Moroccan  crisis  causes  panic 

in  Europe  and  dumping  of  .\merican 
securities  on  New  York  market. 

5.  Attorney-General   begins  suit 
against  U.  S.  Steel  Corporation. 

In  l'>12,  on  the  basis  of  good  crops  and  a  rapidK'  growing 
demand  for  steel,  not  only  for  industrial  purposes  in  the  United 
States  but  for  exportation  abroad,  the  stock  market  adv'anced. 
As  in  the  preceding  year,  howev^er,  the  advance  was  brought  to 
a  halt  by  political  conditions  in  Europe. 

About  the  first  of  October  the  Balkan  states  made  war 
against  Turke\'  and  there  was  danger  that  the  big  powers  would 
be  drawn  in.  The  Balkan  War  continued  into  the  year  1913 
and  the  settlement  b\'  the  Treaty  of  Bucharest  was  so  indecisi\e 
that  it  left  Austria  and  Germany  at  daggers'  points  with  Russia 
and  iur  allies  in  Western  Elurope.  It  was  only  a  question  of 
time  until  war  would  break  out,  and  a  stream  of  stocks  flowed 
steadily  into  W'.iil  Street  from  the  boxes  of  well-informed  capital- 
ists abroad  during  the  first  half  of  1914.  N'e\ertheless,  Wall 
Street  became  optimistic  and  looked  for  better  things  in   1914, 


36 


Forces 


and  American  optimism  had  a  strong  foundation  in  large  grain- 
crops  and  a  record  cotton  crop.  But  just  as  an  autumn  bull 
market  was  expected  to  begin,  the  Great  War  broke  out. 

The  following  table  reviews  the  events  of  the  three  years, 
1912-14: 


Stock  Market  Influences  1912-1914 


Favorable  Factors 

1.  Record  corn  crop  in  1912. 

2.  Large  exports  of  steel. 

3.  Large  crops  in  1914. 

4.  Congress  passes   Federal    Re- 
:serve  Act. 


Unfavorable  Factors 

1.  Democratic  Congress  decides 
on  investigation  of  "money  trust." 

2.  Flood  in  Mississippi  River. 

3.  Balkan  War  in  autumn  of 
1912  causes  Europe  to  sell  American 
stock. 

4.  Republican  party  splits.  Wil- 
son and  Democratic  Congress  elected, 
making  tariff  reductions  certain. 

5.  Union-Southern  Pacific  mer- 
ger dissolved  by  Supreme  Court, 
December,  1912. 

6.  President  Wilson's  speeches 
after  election  antagonistic  to  big 
business  men. 

7.  Revolution  in  Mexico  early 
in  1913;  Taft  withholds  action,  leav- 
ing problem  to  Wilson. 

8.  Democrats  in  Congress  at- 
tack profits  and  wealth. 

9.  Poor  corn  crop  in  1913. 

10.  Settlement  of  Balkan  War 
leaves  Austria  and  Russia  at  daggers' 
points. 

11.  New  Haven  Road  suspends 
dividends. 

12.  Commerce  Com'n  suspends 
proposed  freight  increases  in  1914. 

13.  Great  War  breaks  out  in 
Europe. 

14.  Stock  market  flooded  with 
foreign  holdings;  Stock  Exchange 
closed. 


Twenty    Years   in   the   Stock    Market    37 

War  Boom 

The  Stock  Exchange  remained  closed  from  the  end  of  July 
until  December.  During  this  period  Wall  Street  bankers  were 
busily  engaged  in  making  remittances  of  gold  to  England  to  pay 
the  debts  of  certain  railways  and  cities,  including  New  York, 
which  matured  during  those  months.  Finally  the  debts  were 
largely  settled  and  Charles  M.  Schwab  returned  from  his  inter- 
view with  Lord  Kitchener  with  large  contracts  for  war  supplies. 
About  this  time,  also,  France  and  England  had  depleted  their 
stocks  of  commodities  and  urgently  needed  war  supplies  of  all 
kinds. 

Then  followed  two  years  of  "war  order"  prosperity,  industrial 
stocks  advancing  S35  a  share  on  the  average  during  1914—1916. 
The  rails  recovered  only  about  $20  a  share  from  the  war  panic, 
remaining  heavy  on  account  of  continual  selling  from  England. 

The  following  table  gives  the  leading  events  of  1915-1916: 


Stock  Market  Influences,  191 

Favorable  Factors 

1.  Charles  M.  .Schwab  obtains 
large  orders  for  war  supplies  from 
England.  Orders  for  other  com- 
panies follow. 

2.  Wages  and  prices  low  follow- 
ing panic  of  1914. 

3.  Large  exports  of  food  stufTs  at 
high  prices. 

4.  Money  conditions  become  e.\- 
tremely  easy,  discount  rates  232  to  3 
per  cent. 

5.  Large  gold  imports  from  Eu- 
rope. 

6.  U.  S.  Steel  wins  anti-trust 
suit  in  lower  court. 

7.  France  and  England  sell  S500,- 
000,000  .Anglo-French  notes,  insur- 
ing further  demand  for  war  supplies. 

8.  Record  wheat  crop. 

9.  In  1916  exports  continue  large. 


5-1916 

Unfavorable  Factors 

1.  Lusitania  sunk  in  May,  1915. 

2.  Mexican  problem  continues. 

3.  Early  in  1916  German  sub- 
marine activity  indicates  U.  S.  may 
be  drawn  into  the  war. 

4.  Peace  rumors  and  top-heavy 
prices  adversely  affect  war-order 
stocks. 

5.  Carranza  captures  .American 
troops. 

6.  German  U-53  raids  .Atlantic 
Coast,  autumn  of  1916. 

7.  Crops  in  1916  less  favorable 
than  in  1915. 

8.  .Market  collapses  in  confusion 
during  peace  move  by  Germany. 

9.  President's  Peace  Note  and 
Lansing's  "verge  of  war"  statement 
in  December,  1916. 


44746ii 


St.  Paul's  Daily  News 

Figure  6:  From  Cause  to  Effect 


Metropolitan 


When  business  expands  to  enormous  proixjrtions  or  when  severe  contraction  ensues,  the  Stock  Exchange  becomes 
prominent  since  these  commercial  and  financial  conditions  there  focus.  Wall  Street,  the  mobilizer  of  capital,  flourishes 
or  languishes  as  its  countless  borrowers  and  lenders  flourish  or  languish. 


Twenty    Years   in   the   Stock    Market    39 

America  in  the  War 

The  period  of  participation  in  the  war  by  the  United  States 
was  marked  by  a  decline  of  $35  on  the  average  when  the  war 
broke  out  and  irregularity  until  the  armistice  was  signed. 
Despite  large  profits,  federal  taxes  prejudiced  the  position  of 
the  stockholder.  Moreover,  speculative  demonstrations  were 
frowned  upon  during  war  time.  After  the  armistice  was  signed. 
however,  the  directors  of  most  American  corporations  found 
themselves  possessed  with  large  "undiscounted"  profits,  which 
had  accumulated  during  1918,  and  as  the  Allies  and  the  American 
government  gradually  settled  the  claims  of  these  corporations 
for  work  done,  numerous  plans  were  proposed  to  capitalize  the 
war  profits  by  issuing  stock  dividends,  or  declaring  distributions 
in  cash  or  Liberty  Bonds.  The  recovery  from  the  low  levels  of 
the  war  period  until  the  summer  of  1919  amounted  to  about 
$35  a  share  in  the  industrial  stocks.  The  rails  reco\'ered  only 
$15  on  account  of  uncertainty  as  to  how  Congress  would  dispose 
of  the  railway  problem. 

The  following  table  summarizes  thee\'entsof  the  years  1917- 
1919: 

Stock  Market  Influences,  1917-1919 

Favorable  Factors  Unfavorable  Factors 

1.  Entrance  into  war  by  U.  S.  1.  Unrestricted  submarine  war- 
means  large  demand  for  war  supplies.  fare  by  Germany  causes  disaster  to 

2.  Decline  in  rails  halted  by  shipping  and  confuses  market  senti- 
Government  guarantee  of  income  on  mcnt. 

December  26,  1917.  2.  Federal   war  taxes  cause   un- 

3.  Guarantee  of  minimum  price  certainty  regarding  earnings. 

for  wheat  promises  large  crops  and  3.  Russian      Imperial      Govern- 
therefore  heavj'  volume  of  trade.  ment  overthrown  March,  1917. 

4.  Weakening  of  German  morale,  4.  Federal  price  fixing  initiated 
August,  1918,  causes  optimism.  summer,  1917. 

5.  Following  Armistice,  Nov.  11,  5.  (Operating  expenses  increased, 
1918,  corporation  officials  find  them-  railroads  in  sad  plight. 

selves  possessors  of  large  undis- 
tributed surpluses;  certainty  of  ex- 
tra dividends  or  stock  dividends  cause 
price  advances,  March  to  July,  1919. 


40  Forces 

Stock  Market  Influences,  1917-1919  (continued) 

Favorable  Factors  Unfavorable  Factors 

6.  War    savings    flow    into    the  6.  Italian  army  suffers  disaster. 
stock  market  during  spring  and  sum-  7.  Bolsheviks  overthrow   Keren- 
mer,  1919.                                                     sky  government. 

7.  President  Wilson  refuses  de-  8.  Collapse  of  foreign  exchanges 
mand    to    increase    railway    wages;      indicates  check  to  exports. 

Judge  Gary  refuses  to  confer  with  9.  Demands  of  railway  employes 

radical  labor  agitators.  and  strike  in  steel  industry  dampens 

speculative  enthusiasm. 

America  After  the  War 

Immediately  after  the  signing  of  the  Armistice  came  the 
natural  reaction  from  the  speculative  furore  of  the  War.  In 
early  1919,  however,  the  pent-up  demand  for  goods  made  itself 
felt  and  we  entered  into  a  period  of  inflation.  This  culminated 
in  the  Fall  and  early  months  of  1920.  Then  followed  one  of  the 
most  drastic  readjustments  that  the  country  has  ever  experi- 
enced. 

The  first  industries  to  liquidate  were  the  Silk,  Textile,  Woolen 
and  Leather.  These  were  directly  followed  by  others  until  by 
the  Fall  of  1920  most  industries  were  well  into  a  period  of  liqui- 
dation. Raw  producers  were  most  adversely  effected,  particu- 
larly the  farmer.  Liquidation  of  food  products  continued  until 
Wheat  sold  below  $1.00  against  a  fixed  price  of  $2.70  during 
the  War,  while  Corn  and  Oats  went  below  50  cents.  As  the 
farmer  afford-s  35%  to  40%  of  the  total  purchasing  power  of 
the  country  this  brought  a  most  severe  depression.  Such  de- 
pression continued  through  late  1920  and  through  1921. 

In  the  year  1921  this  resulted  in  a  marked  easing  in  money 
conditions  due  to  the  fact  that  the  loans  of  the  war  period  were 
being  paid  up  and  that  business  did  not  demand  much  new 
capital.  The  natural  result  of  these  increased  funds  was, 
first,  the  largest  upward  movement  in  bond  prices  in  years, 
second,  the  use  of  funds  in  speculation. 

The  stock  market,  discounting  the  natural  improvement  in 
business,  following  such  a  deflation,  rose  an  average  of  2>5  points 
from  the  lows  of  June-August,  1921,  without  any  reaction  of 


Twenty    Years   i7i   the  Stock    Market    41 


importance.  Due  to  the  varying  effects  of  the  deflation^ 
ho\ve\er,  the  advance  was  very  uneven,  equipment,  construc- 
tion, food,  and  chain  store  stocks  rising  greatly,  while  tire  and 
rubber,  fertilizer,  copper,  oil  and  iron  and  steel  stocks,  due  tO' 
the  over-expansion  of  the  war  in  these  various  industries,  lagged 
perceptibly. 

Stock  Market  Influences  1920-1922 


Favorable  Factors 

1.  Good  crops. 

2.  Improving  money  conditions. 

3.  Ending  of  the  period  of 
inflation  which  had  brought  such 
extravagance. 

4.  Republican  President  elected 
which  was  supposed  to  be  favorable 
to  business. 

5.  Export  trade  continued  good 
in  spite  of  readjustment. 

6.  Investment  securities  ad- 
vance rapidly  in  price. 

7.  Savings  bank  deposits  in- 
crease. 

8.  Reserve  in  Federal  Reserve 
Banks  increase  rapidly. 

9.  Loans  and  re-discounts  in 
Federal  Reserve  Banks  decline  radi- 
cally. 

10.  Continuance  of  large  gold   im- 
ports. 

11.  Full     tni|)l()yment      at      high 
wages   toward    end    of    1922. 


Unfavorable  Factors 

1.  Unparalleled  decline  in 
commodity  prices. 

2.  Heavy  inventory  losses  by 
most  industrial  companies. 

3.  Many  industrial  companies 
operating  at  large  deficit. 

4.  Continued  declines  in  foreign 
exchanges. 

5.  The  failure  of  labor  to  liqui- 
date and  to  decline  in  price  in  propor- 
tion to  commodity  prices. 

6.  General  unrest. 

7.  Continued  high  taxation. 

8.  Hands  of  Republican  admin- 
istration tied  by  Congress. 

9.  Position  of  the  Farmers 
becomes  the  worst  in  thirty  years. 

10.  Purchasing  power  of  nation 
declines  rapidly. 

11.  Railroads  fail  to  earn  amount 
outlined  for  them  in  War  legislation. 

12.  Failures  are  the  greatest  in 
years. 

13.  Unwise  tariff  legislation. 

14.  Great  unemployment. 

15.  Unequal  declines  in  various 
commodity  prices  lead  to  much 
uncertainty  and  dissatisfaction. 


What  Next  We  Consider 


Thinking  over  the  foregoing  tables  leads  a  man  to  iIr-  essen- 
tial viewpoint,  that  prices  arc  made  by  forces,  and  that  in 
seeking  out  these  forces  he  works  from  cause  to  effect. 


42  F  0  r  c  e  s 

There  is  another  conclusion  which  he  will  draw,  which  is 
scarcely  less  valuable.  These  tables  containing  briefly  summa- 
rized forces  which  have  made  prices,  are  composed  of  two 
columns,  favorable  and  unfavorable.  No  situation  has  ever  been 
so  favorable  that  certain  adverse  factors  did  not  at  the  same  time 
exist,  and  never  is  a  bearish  situation  without  some  bullish 
factors.  What  takes  place  with  respect  to  prices  depends  upon 
which  set  of  factors  exerts  stronger  influence.  The  favorable 
factors  decidedly  in  the  ascendant,  prices  mount;  the  unfavor- 
able factors  predominant,  prices  fall.  The  exchange  floor  at  all 
times  represents  a  tussle  between  forces  which  make  for  higher 
prices  and  forces  which  make  for  lower. 

This  broad  survey  of  forces  which  make  prices  will  now  be 
followed  by  a  closer  examination  of  how  the  process  works. 
The  first  phases  of  this  examination,  called  "From  Gross  to 
Dividends,"  takes  us  into  the  financial  structure  of  the  cor- 
poration itself. 


CHAPTER    V 
FROM    GROSS   TO    DnTDEXDS 

A  Study  in  Corporation  Finance 

The  paragraphs  in  the  preceding  chapter  contain  a  sound 
summary  of  items  which  were  the  principal  forces  setting  prices 
during  the  past  twenty  years,  and  it  is  safe  to  say  some  of  them 
will  still  be  in  harness  making  markets  when  the  \-oungest 
subscriber  has  grown  gray  in  financial  wisdom. 

Let  us  now  study  further,  in  the  attempt  to  see  more  clearly 
how  these  forces  exert  their  influence  in  the  market.  This  next 
step  takes  us  into  corporation  finance. 

It  will  be  a  study  of  the  gross  income  of  corporations  whose 
stocks  are  popularly  known  as  "market  leaders."  The  purpose 
is  to  show  how  the  movements  of  these  stocks  are  intimately 
related  to  fluctuations  in  that  narrow  slice  of  gross  income  known 
as  the  "balance  available  for  dividends." 

The  following  eleven  stocks  during  the  year  1917  were 
traded  into  the  extent  of  80,000,000  shares.  The  transactions 
in  them,  in  fact,  comprised  about  four  out  of  every  ten  shares 
bought  and  sold  on  the  Exchange: 

Anaconda  Oopper  Alining  Company 
Baldwin  Locomoti\c  Works 
Bethlehem  Steel  Corporation 
Central  Leather  Company 
Mexican  Petroleum  Company 
Republic  Iron  and  Steel  Company 
The  Studebakcr  (Corporation 
L'nited  Fruit 
U.  S.  Rubber 
U.  S.  Steel 
Utah  Copper 


44  Forces 

This  list  contains  representives  of  the  steels,  motors,  cop- 
pers, equipments,  oils,  and  leathers.  Hence  in  addition  to  its 
liigh  turnover  compared  with  the  Exchange's  total  volume  of 
business,  it  represents  with  fair  accuracy  Wall  Street's  diversified 
industrial  interests. 

Let  us  now  sketch  the  course  of  these  eleven  corporations' 
income  from  gross  to  dividends.  We  say  sketch,  because  the 
•disposal  of  corporate  income  is  to  be  considered  fully  in  the 
texts  studying  The  Financing  of  Enterprises,  and  our  interest 
here  is  simply  to  get  at  market  forces. 

Shares  and  Their  Priority  Claims 

These  eleven  companies  in  1917  reported  gross  earnings  of 
-over  two  billion  five  hundred  million  dollars  ($2,500,000,000). 

Various  persons  lay  claim  to  these  gross  earnings.  Labor 
wants  its  pay  envelope,  the  suppliers  of  raw  materials  submit 
their  bills,  and  numerous  other  expense  items  must  be  satisfied. 
Most  of  the  heavy  demands  of  these  persons  and  items  are  backed 
up  by  priorities,  and  very  nearly  85  per  cent  of  gross  must  be 
•disbursed  to  satisfy  them. 

The  bondholders  comprise  another  group  with  a  priority 
claim  on  gross  income.  Their  claim  —  interest  —  is  an  impor- 
tant fixed  charge  against  railway  income,  but,  be  it  noted,  in 
the  case  of  those  corporations  here  considered,  interest  removes 
but  a  narrow  strip  from  gross  income.  Most  industrial  com- 
panies avoid  issuing  bonds,  if  possible. 

Next  after  the  bond  owners  the  preferred  stockholders  have 
a  priority,  although  one  less  urgent  in  nature.  Their  slice 
equals  3  per  cent,  or  more,  of  gross. 

The  directors  now,  with  approximately  88  per  cent  of  the 
original  gross  no  longer  available  for  distribution,  face  the 
common  stockholders.  They  do  not  vote  the  remaining  12  per 
cent  of  gross  as  common  dividends,  howe\-er.  With  conserva- 
tive intent,  they  set  aside  as  "surplus"  a  fairly  generous  portion 
—  and  the  thin  stream  of  what  still  remains  of  gross  dribbles 
into  the  common  stockholder's  purse. 


Fr  om  G  r  0  s  s   to   Dividends  45 

The  relative  magnitude  of  dividends  on  common  stocks  as 
compared  with  wages  and  other  prior  claims  against  gross 
income  is  suggested  in  the  table  below: 

Distribution  of  Gross  Income 


Wages  and  materials     .... 
Allowance  for  depreciation 
Interest  and  pfd.  dividends 
Improvements,  etc.,  out  of  surplus 
Dividends  on  common  stocks 


$2,000,000,000  80.0% 

125,000,000  5.0 

75,000,000  3.0 

200,000,000  8.0 

100,000,000  4.0 


Total  gross  income    ....     $2,500,000,000  100.0% 

Consider  the  corporation's  gross  income  as  flowing  toward 
the  common  stockholder.  Then  note  the  process  of  distribu- 
tion, how  the  large  proportion  of  the  gross  earnings  consumed 
by  expenses  for  wages  and  materials,  and  how  small  is  the 
margin  of  dividends  actually  paid. 

Having  presented  the  relation  of  gross  to  dividends  in  its 
general  aspects,  let  us  now  study  individual  cases. 

Bethlehem  Steel  in  1918  had  a  gross  income  of  $44S, ()()(), 000, 
yet  the  earnings  on  the  common  shares  were  only  $11,000,000, 
or  2.5  per  cent  of  gross,  while  the  dividends  actually  paid  to  the 
common  stockholders  were  only  $4,458,000,  or  one  per  cent  of 
gross.  The  United  States  Steel  Corporation  did  a  little  better, 
showing  earnings  for  Steel  common  equal  to  6.42  per  cent  of 
gross,  and  dividends  for  the  stock  equivalent  to  4.07  per  cent 
of  gross  income. 

In  view  of  the  importance  of  the  earnings  of  Slecl  common 
to  the  man  of  independent  judgment  as  a  basis  for  his  personal 
study  of  investment  conditions,  we  are  printing  a  table  here 
showing  a  statistical  history  of  the  income  and  dividends  on 
this  stock  since  1902.  This  table  shows  how  the  "balance  for 
common"  dropped  from  554,000.000  in  1902  to  $5,000,000  in 
1904;  rose  to  $79,000,000  in  1907,  only  to  fall  to  $20,000,000 
the  next  year;  fell  below  zero  in  1914,  and  rose  to  $246,000,000 
two   years   later.     Then,    most   extraordinary   of   all,    ii"'f    'In- 


46 


F  0  r  c  e  s 


rapid  decline  from  1916,  to  only  $10,000,000  in  1921.  Surely 
this  is  a  feast  and  famine  record  which  suggests  that  there  will 
always  be  opportunities  for  profitable  speculation  in  following 
the  trend  of  the  steel  business. 

U.  S.  Steel  (000  omitted) 


Gross  Income 

Bal.  for 

Com. 

Com.  Div.  Pd. 

Year 

Amt. 

%  of  Gross 

Amt. 

%   of  Gross 

1903 

$536,573 

$25,013 

4.66% 

$12,708 

2.36% 

1904 

444,405 

5,048 

1.12 

000 

.00 

1905 

585,332 

43,365 

7.35 

000 

.00 

1906 

696,757 

72,909 

10.47 

10,166 

1.46 

1907 

757,015 

79,346 

10.43 

10,166 

1.34 

1908 

482,308 

20,509 

4.25 

10,166 

2.11 

1909 

646,382 

53,854 

8.35 

20,332 

3.14 

1910 

703,961 

62,187 

8.80 

25,415 

3.60 

1911 

615,149 

30,080 

4.87 

25,415 

4.13 

1912 

745,506 

29,020 

3.89 

25,415 

3.40 

1913 

796,894 

55,997 

7.03 

25,415 

3.18 

1914 

558,415 

(Def.)  1,723 

—.30 

*15,249 

2.72 

1915 

726,684 

50,614 

6.96 

6,354 

0.86 

1916 

1,231,474 

246,312 

19.98 

44,476 

3.61 

1917 

1,683,963 

198,999 

11.81 

91,494 

5.43 

1918 

1,744,312 

112,312 

6.42 

71,162 

4.07 

1919 

1,448,557 

51,380 

3.54 

25,415 

1.75 

1920 

1,755,477 

83,842 

4.78 

25,415 

1.45 

1921 

986,750 

10,311 

1.04 

25,415 

2.57 

1922 

1,092,697 

13,514 

1.24 

25,415 

2.32 

$17,706,425 

81,283,961 

7.25% 
av. 

8490,511 

2.77% 
av. 

♦Paid  out  of  surplus. 


Eliminating  Bethlehem  and  U.  S.  Steel  from  the  list  of 
eleven  companies  grouped  above,  we  find  that  the  di\'idend& 
on  the  remaining  nine  will  average  about  5.5  per  cent  of  gross 
and  the  total  "balance  for  common"  about  15  per  cent.  This 
is  evidence  that  dividends  average  onlv  one-third  of  the  income 


1915 

1918 

$380,500,000 

$779,600,000 

55,250,000 

100,450,000 

17.1^:^ 

13% 

820,700,000 

$42,900,000 

5.4% 

5.5% 

F  r  0  m  G  r  0  s  s    t  0    D  i  V  i  d  e  n  d  s  47 

actually   earned   by  common   shares.     Note   this   point   in    the 
following  table: 

Earnings,  Nine  Companies 

Gross  income 

Earned  on  common  shares  . 
Earned,  per  cent  of  gross 
Dividends  paid  on  common  shares. 
Dividends  paid,  per  cent  of  gross   . 

The  important  suggestions  derived  from  a  study  of  the 
above  tables  are: 

1.  That  dividends  take  a  \er\'  small   proportion   from   the 

gross  earnings  of  industrial  enterprises,  generally  from 
3  to  5  per  cent  of  gross  income. 

2.  That  a  very  small  increase  in  wages  tends  to  wipe  out 

dividends   unless   the   gross   income   increases   in   pro- 
portion.    And, 

3.  That,  conversely,  dividends  can  easily  double  or  treble 

with  a  very  slight  gain  in  gross  income,  if  the  outlay 
for  wages  and  materials  does  not  gain  in  proportion. 

Dividends  VS.  Earnings  as  a  Market  Guide 

We  have  stated  that  the  amount  of  earnings  put  back  into 
the  property  for  improvements  by  most  industrial  companies 
is  more  than  double  the  amount  paid  as  dixidcnds.  Stock- 
holders must  sacrifice  present  enjoyment  of  income  for  the 
purpose  of  expanding  operating  facilities.  The  income  to  which 
they  are  actualK'  entitled  is  largely  paid  to  workmen  employed 
in  increasing  equipment.  On  the  average,  industrial  companies 
pay  dixidends  of  SI. 00  out  of  every  three  earned  by  common 
shares,  the  other  S2.00  being  spent  for  betterments  or  put  aside 
to  swell  "surplus."  The  stockholders,  of  course,  retain  owner- 
ship of  the  income  put  back  in  the  property,  and  the  jirice  of 


48  Forces 

the  stock  usually  reflects  such  investment  in  equipment.  This 
is  especially  brought  out  by  showing  the  fluctuations  in  the  price 
of  Steel  common  as  compared  with  dividends  and  earnings  per 
share. 

Whenever  earnings  are  large,  the  stock  rises  in  anticipation 
of  heavy  dividends.  If  the  earnings  double  or  treble,  it  is 
expected  that  dividends  may  double  or  treble,  and  the  price  of 
the  stock  leaps  upward.  But  when  the  directors  vote  to  appro- 
priate two-thirds  of  the  earnings  on  the  common  stock  to  the 
improvement  of  plant,  and  distribute  only  one-third  of  the 
profits  to  the  stockholders  as  dividends,  the  speculators  are 
perplexed  as  to  whether  the  stock  should  sell  on  the  basis  of 
book  value  of  the  plant,  or  in  relation  to  the  amount  of  cash 
dividends  actually  distributed. 

Investors  know  that  an  increase  in  profits  means  either 
larger  dividends  or  an  increased  equity  in  the  company's  plant, 
and  while  the  money  market  is  calm,  the  stock  rises.  But  when 
a  panic  comes  and  there  is  a  premium  on  cash,  investors  begin 
to  appraise  property  in  terms  of  cash  dividends,  ignoring  book 
values.  The  stock  during  a  panic  therefore  falls  to  a  close  rela- 
tion with  the  cash  dividends.  The  book  value  of  "equity"  in 
plant  is  largely  ignored.  After  the  panic  has  passed,  however, 
it  is  once  again  recalled  that  large  amounts  of  money  have  been 
invested  in  property,  and  the  stock  rises  in  anticipation  of 
future  earnings  on  this  increased  property. 

In  the  long  run,  the  average  price  during  a  period  of  eight 
or  ten  \'ears  bears  a  close  relation  to  cash  dividends  paid.  In 
the  swings  of  the  stock-market  cycle,  however,  due  considera- 
tion is  given  to  the  amount  of  earnings  invested  in  capital  equip- 
ment. Thus  the  stock  market  reflects  a  see-saw  movement  of 
prices,  at  one  time  rising  in  anticipation  of  the  future  income 
yield,  but  later  falling  to  a  level  which  gauges  the  actual  cash 
dividends  paid. 

Since  the  biggest  possibilities  in  making  money  lie  in  buying 
during  periods  of  depression  and  selling  during  periods  of 
prosperity,  it  is  more  profitable  to  give  greater  attention  to  fluctu- 
ations in  earnings  on  the  stock  than   to   the  yield   from   actual 


From  Gross   to   Dividends 


49 


dividends  paid.  This  is  demonstrated  in  the  following  chart, 
which  shows  how  the  price  of  Steel  common  has  fluctuated  with 
the  percentage  earned  per  share  since  1902.  Price  movements, 
it  is  noted,  precede  dividend  changes  to  a  conspicuous  extent. 

The  question  arises, 
how  shall  we  forecast 
when  the  earnings  are 
going  to  increase  or  de- 
crease? In  answering 
this  question  there  are 
two  classes  of  factors  to 
consider.  First,  the  steel 
industr>''s  internal  ba- 
rometers, such  as  the 
"new  orders  booked" 
and  the  changes  in  the 
selling  prices  of  steel 
products.  Second,  those 
fundamental  factors 
which  determine  the  big 
swings    in    orders    and 

1902-1921.    Key— Graph    ".A."— Prices    Steel    Common.  mCtal   priCCS.        1  nCV  are 
Grapli"B" — Earnings  per  share.  Graph  "C" — Dividends,  piainlv      CrOpS        politics 

and  money  conditions.  Just  how  these  fundamental  factors  in- 
fluence the  l)u>ing  policy  of  consumers  and  the  selling  policy  of 
the  steel  companies  will  be  analyzed  later  in  the  text  on 
"Business  C\-cles."  At  this  point  we  will  merely  exhibit  a 
chart  which  affords  graphic  evidence  of  the  close  relation  of 
''orders  booked''  and  money  rates  to  the  price  of  Steel  common 
in  the  stock  market. 

It  will  he  noted  that  when  unfilled  orders  increased  in  1905, 
1909,  1912,  and  1915,  there  was  a  rapid  increase  in  the  price  of 
the  stock.  When  the  otlicials  of  the  corporation  and  keen 
observers  in  Wall  Street  noticed  that  orders  were  falling  off 
in  1907,  1910,  191.^  and  191S.  however,  the  price  rapidly 
fell. 


m  \fA   \r.o 


I?;?    i?ii    i?i3    1715    m    w   m    Kj 
\m   m    m   \%   m   m   m 


Figure  7:  Steel  Common 

Quarterly  dividends,  earnings  and  price  fluctuations. 


50 


Forces 


This  close  relation  of  orders  to  prices  was  continued  after  the 
armistice  in  November,  1918.  For  a  few  months  orders  were 
low  and  prices  heavy,  but  when  orders  increased  in  the  spring 
of  1918,  investors  again  became  confident  and  Steel  common 
advanced. 


1904  1905  1906  1907  1908  1909  1910  1911  1912  1913  1914'  1915  I91fe  1917  1918  1919 


1904  1905  1906  1907  1908  1909  1910  1911  1912  1913  1914  1915  1916  1917  1918  1919 


2400 
2J300 
1600 
1200 
600 
400 
0 


Figure  7:  Stock  Prices  and  Fundamentals 

The  dose  relation  between  money  rates,  orders  booked  by  the  Steel  Corporation,  and 
'the  price  of  Steel  common  here  is  graphically  presented. 


CHAPTER  VI 
LOOKING   AHEAD 

The  Sinews  of  Wall  Street 

What  the  sinews  of  Wall  Street  really  are  begins  to  become 
more  clear.  While  board  room  "rust"  often  obscures  these 
sinews  and  while  under  skilful  camouflage  effects  frequently  are 
mistaken  for  causes,  the  preceding  study  has  revealed  the  under- 
lying forces  in  a  way  which  will  prove  useful.  This  in  itself 
represents  no  small  achievement,  since  market  perspective  and 
a  knowledge  of  the  real  price-making  forces  very  often  are  not 
gained  in  several  years'  experience.  Meanwhile,  the  would-be 
financier  bumps  along,  with  a  few  ups  and  many  downs,  wonder- 
ing why  it  is  he  does  not  strike  things  better. 

Winning  golfers  like  Travers  and  champion  sluggers  like  Ty 
Cobb  state  their  rule  of  success  in  this  way:  Keep  >'Our  eye  on 
the  ball.     This  rule  also  has  a  fruitful  application  in  Wall  Street. 

Questions  Which  Point  the  Right  Way 

The  common  stockholder,  standing  expectantly  at  (he  end 
of  the  liiu',  ui)()ii  surveying  the  sources  of  his  income  ii.ituralK- 
feels  concerned  in  the  various  intermediate  steps  of  this  process 
from  gross  to  dividends.  Those  steps  affect  his  money  re- 
ceipts; hence  in  concentrating  up^m  tluin  he  practices  the 
Travers-Cobb  achice  to  keep  his  eye  on  the  ball. 

These  intermediate  steps,  since  they  comprise  everything 
which  has  to  do  with  tlu'  iiicoiiK--])ro(lucing  capacity  of  a  stock 
and  the  rates  for  mone\-,  are  necessaril\-  \aried  in  nature.  The 
summaries  in  the  preceding  chajiter  present  the  most  important 
of  I  lu-ni : 

How  are  the  crops? 
Are  the  factories  busy? 


.52  Forces 

Do  the  mines  operate  at  capacity? 
Are  railroads  well  supplied  with  traffic? 

What  is  the  value  of  exports?  of  imports?  the  excess  of  exports  over 
imports? 

What  is  the  attitude  of  labor?  the  extent  of  unemployment?  the  brand 
of  philosophy  preached  by  agitators? 

Are  politicians  favorable  to  business?  What  is  doing  in  Congress,  the 
State  Legislature  and  the  courts  on  economic  matters? 

Are  money  rates  high  or  low?  What  is  the  condition  of  the  New 
York  banks?  of  the  London  and  continental  money  markets? 
Which  way  is  gold  moving,  and  in  what  volume? 

What  in  general  is  the  condition  of  business?  Is  it  good  or  bad?  Are 
business  men  buoyant  or  depressed?  Do  they  favor  a  policy  of 
expansion  or  of  curtailment? 

How  is  this  particular  corporation  affected  by  the  preceding  condi- 
tions? What  are  its  earnings,  gross  and  net?  How  high  are  its 
fixed  charges?  its  preferred  dividends?  When  distributing  surplus, 
are  the  directors  conservative  or  prodigal? 

The  common  stockholder,  therefore,  as  he  stands  at  the  end 
•of  the  Hne,  has  in  addition  to  his  expectancy  an  inquiring  mind 
and  numerous  questions. 

The  Profit  Maker's  Point  of  View 

A  certain  point  of  view  upon  this  common  stockholder's  part 
is  here  so  essential,  yet  so  generally  disregarded,  that  we  preface 
our  discussion  of  it  with  a  little  story  of  two  big  profit  makers. 

In  the  days  when  Andrew  Carnegie  was  still  "King  of  the 
Steel  Makers"  his  lieutenant  was  one  Charles  M.  Schwab. 
Carrying  out  certain  constructive  notions  which  shaped  them- 
selves in  his  mind,  Schwab  planned  the  Homestead  Steel  Works, 
to  cost  $10,000,000,  an  enormous  undertaking  for  that  period. 
The  first  that  Carnegie  heard  of  it  was  when  he  arrived  in  Pitts- 
burgh from  Scotland  one  morning  and  Schw'ab  laid  the  plans 
before  him. 

"Charlie,"  he  gasped,  "where  would  we  ever  sell  the  entire 
•output  of  such  a  plant?" 

"Look  here,  Mr.   Carnegie,  at  these  statistics  showing  the 


Looking   Ahead  53 


i» 


annual  consumption  of  steel  in  this  country,  see  in  how  few 
years  the  demand  doubles." 

"Never  in  the  world  could  we  sell  such  an  oul|)ut,"  responded 
Mr.  Carnegie.  "Charlie,  put  those  plans  right  in  your  drawer 
and  keep  them  there.     Don't  show  them  to  anybod\-." 

The  great  general  is  first  a  great  soldier,  and  Schwab  was 
Carnegie's  most  loyal  soldier.  Without  a  word  those  plans 
were  laid  away  and  soon  forgotten.  Within  two  >'ears  the  cable 
came  from  Scotland:  "I  have  borrowed  the  monc\-  here.  Build 
the  Homestead." 

It  took  all  the  organization  ability  of  Schwab  to  rush  those 
works  to  completion  in  time  to  meet  the  rising  American  tlcmand 
for  steel.  In  a  few  years  the  Homestead  was  but  a  small  part 
of  the  Carnegie  works,  whose  total  annual  net  earnings  were 
four  times  the  construction  cost  of  the  Homestead.  Today 
the  entire  Carnegie  works  arc  but  a  minority  in  the  United 
States  Steel  Corporation,  while  Schwab  himself  with  char- 
acteristic vision  has  pushed  Bethlehem  Steel  into  a  remarkable 
position  second  only  to  this  great  billion-dollar  concern. 

Schwab  and  Carnegie  looked  ahead.  Their  plans  were  laid 
for  future  conditions  and  their  rewards  were  due  to  foresight. 

"Keeping  a  little  ahead  of  conditions,"  declares  Schwab, 
"is  one  of  the  secrets  of  successful  business;  the  trailer  seklom 
goes  very  far." 

The  Commercial  and  Financial  Mainspring 

This  incident  of  Carnegie  and  Schwai)  introduces  us  to  a 
matter  of  basic  importance,  whose  e\er\-da>'  realness  is  not 
usually  appreciated. 

When  a  manufacturer  conmiences  to  set  the  marki-tiug  pi  ice 
for  his  commodity,  which  cost  to  produce  is  fundamental  — 
past  cost,  present  cost,  or  costs  which  he  aulicipatcs  later  will 
prevail?  While  it  is  true  that  in  the  case  of  staple  articles 
which  are  continually  being  reproduced  and  whose  costs  do  not 
vary  a  great  deal  from  time  to  time,  the  figure  o\'er  which  he 
ponders  will  be  practicalK'  the  same  if  not  identical  with  fxist 


54  F 0  r  ce s 

records,  it  is  even  in  this  case  and  markedly  so  in  other  cases  a 
new  figure,  the  cost  expected  to  prevail  in  the  future  rather  than 
the  cost  experienced  in  the  past,  which  acts  upon  the  manufac- 
turer as  a  controlling  motive  when  he  comes  to  set  his  selling 
price.     The  future  is  his  real  touchstone. 

Should  he  consider  the  securing  of  additional  capital,  its 
present  value  to  him  is  the  discounted  value  of  the  expected 
income  —  again  a  calculation  based  upon  things  anticipated. 

This  principle,  however,  is  widely  applicable.  Upon  what 
does  the  value  of  all  economic  goods  depend?  Upon  the  satis- 
factions which  they  atTord,  that  is,  the  agreeable  sensations 
derived  from  them  or  the  disagreeable  sensations  which  their 
use  enables  us  to  avoid.  These  satisfactions  are  matters  of  the 
future.  In  purchasing  a  pair  of  shoes,  a  house,  a  motor  car  or 
an  aeroplane,  we  bank  upon  this  future,  with  all  its  chances  and 
risks;  and  the  price  now  paid  equals  the  discounted  value  of  the 
article's  expected  benefits.  These  expectations  may  be  sur- 
passed later  when  the  commodity  is  consumed  or  the  benefits 
possibly  will  fall  short  of  the  estimate,  but  in  either  case  it  is 
expectation  and  not  realization  which  gives  these  economic  goods 
their  current  value. 

Calculations  of  the  future  are  the  mainspring  of  commerce 
and  finance,  the  real  basis  of  everyday  buying  and  selling. 


Jay  Gould's  Statement 

Finance  is  the  most  highly  flexible  and  elastic  portion  of  the 
whole  production  process,  and  with  it  calculations  of  the  future 
have  an  unusual  currency.  Present  worth  of  its  wares,  or 
securities,  depend  upon  calculations  of  the  benefits  later  to  be 
derived  in  the  form  of  interest  pa^^ments  and  dividends;  and 
calculations  of  the  rate  of  interest  by  means  of  which  these 
future  values  may  be  translated  into  present  values  through 
the  process  of  discounting.  Here,  as  elsewhere,  the  practical 
realness  of  the  future  again  appears. 

The  testimony  of  Jay  Gould  affords  in  this  connection  an 
interesting  sidelight,  in  that  it  reveals  the  bent  of  the  financier's 


Looking   Ahead  5S 

mind.  Mr.  Gould  was  on  the  witness  stand,  under  cross- 
examination  concerning  certain  past  events  with  respect  to 
Union  Pacific. 

"I  consider  the  future  of  a  road  more  important  than  its  past." 

Q.     "Yes,  but  what  I  want  .  .  ." 

"The  past  was  no  criterion  as  to  the  Union  Pacific  Road." 

Q.  "But  don't  you  think  that  General  Dodge  and  Mr. 
Humphreys  .   .   .   ?" 

"All  my  life,"  replied  Mr.  Gould,  warming  up,  "all  my  life 
I  have  been  dealing  in  railroads  —  that  is,  since  I  have  been  of 
age,  and  I  have  always  considered  their  future  and  not  their  past. 

"That  is  the  way  I  have  made  my  money,"  he  continued. 
"The  ver>'  first  railroad  I  ever  bought  had  a  most  deplorable 
past,  but  its  future  was  fair.  I  paid  ten  cents  on  the  dollar 
for  its  bonds,  and  finally  sold  the  stock  for  $125.  It  was  the 
future  of  the  Union  Pacific  that  drew  me  into  it.  I  went  into  it 
to  make  money." 

The  common  stockholder,  we  may  conclude,  if  he  is  to  secure 
profits  there  at  the  end  of  the  line  from  gross  to  dividends,  con- 
cerns himself  primarily  with  anticipated  earnings  of  the  cor- 
poration and  anticipated  money  rates.  With  a  fine  disdain  of 
the  obvious,  he  mounts  into  some  favored  post  of  observation, 
armed  with  telescope,  and  faces  fonvard. 

What's  Ahead? 

Wall  Street's  leading  money  makers  all  keep  an  e>e  upon 
coming  events.  When  the  outlook,  as  they  see  it,  fa\ors  a  period 
of  depression,  they  distribute  stocks  in  anticipation  of  curtailed 
orders,  factories  running  on  half  time,  unemployment,  poor 
earnings,  and  reduced  dividends.  When  these  latter  conditions 
in  due  time  become  obvious,  these  same  persons  very  likely  are 
then  accumulating  stocks  upon  the  prospect  of  business  im- 
provement. 

Wall  Street  discounts  coming  events,  and  translates  i(s  forecasts 
of  the  future  into  actual  concrete  prices  for  securities. 


56 


F  0  r  c  e  s 


The  "mystery"  of  why  the  stock  market  acts  so  and  so,  very 
commonly  has  here  its  explanation.  The  market  moves  upon 
prospects  as  far  ahead  as  the  best  informed  people  can  see,  and 
its  present  prices  are  based  upon  estimates  of  future  conditions. 


ticvP' 


lateA" 


,;V^^^*^ 


\pa' 


,tei' 


,  M^*^^ 


VcvP^ 


ted' 


,  .v»f^<^ 


\pate4* 


"Melons" 


Dividends 


"Lemons" 


/j{/c, 


'^afed. 


Unfilled  Orders 
Net  Earnings 
Manipulation 


Money  Rates 
Tariffs 
Business  Sentiment 
Crops 


Gross  Earnings 


Mn 


f'c/pa 


fecf. 


Wages 
Business  Failures 


'Ant, 


'"'Pat 


ed. 


Politics 
Strikes 
Wars 
■•^""■^'■Pated^ 


Taxes 


Figure  9:  The  Right  Viewpoint 


The  person  who  deals  in  securities  raises  continuously  such  questions  as  "Buy  or  sell,  or 
hold  my  position?    Which'  stock?"    Their  correct  answer  calls  for  foresight,  a  looking  ahead. 


A  person  cannot  speculate  upon  the  obvious. 

The  so-called  "insider"  differs  from  the  great  majority  of 
investors  and  traders  in  that  he  bases  his  commitments  upon 
calculations  of  future  economic  conditions  while  the  attention  of 
the  majority  almost  exclusively  centers  in  prevailing  conditions. 
"Why  does  the  market  not  respond?"  the  outsider  inquires  in 
disgust  when  his  stock  sluggishly  moves  off  the  very  day  its 
statement  of  excellent  earnings  had  appeared  in  all  the  news- 
papers.    "It  already  has,"  thinks  the  insider;  "what's  ahead?" 

While  all  events  cannot  be  discounted  and  many  either  are 
overdiscounted  or  underdiscounted  (as  will  be  considered  later) 
the  fact  that  in  general,  stock  prices  move  ahead  of  present  con- 
ditions and  the  certainty  that  they  will  discount  everything 
obvious,  is  the  most  important,  the  simplest  and  the  most 
disregarded  of  all  speculative  features.  Riddance  of  this  fault 
alone,    under   the   methods   outlined    from   Text   to   Text,   will 


Look i n g    A h c a d  5  7 

possess  you  of  a  changed  viewpoint  which  not  onl\-  wins  profits 
in  Wall  Street  but  an^'^vhere  in  business. 

The  Next  Step 

Future  business  conditions,  in  the  form  of  items  wiiich 
affect  the  income-producing  capacity  of  corporations  and  the 
cost  of  money,  bear  upon  present  stock  prices  through  the 
medium  of  minds  engaged  in  the  attempt  to  forecast.  The 
beliefs  of  persons  with  funds  and  their  hopes  and  fears  con- 
cerning the  future  are  in  the  end  what  rule  upon  the  Exchange 
floor,  and,  since  values  wax  and  wane  as  these  beliefs  change,  it 
is  essential  to  know  the  methods  with  which  Wall  Street  manipu- 
lators play  upon  the  mind. 

The  subject  opened  up  in  Text  III,  "Manipulation  and 
Market  Leadership,"  is  a  very  interesting  one;  and  our  survey 
of  forces  which  make  the  market  cannot  be  at  all  complete 
until  we  have  delved  into  it. 


Garden  City  Press,  Inc. 
Neivton,  Mass. 


TEST  QUESTIONS 
"FORCES   WHICH   MAKE   PRICES" 

The  Test  Questions  which  are  unstarred  can  be  answered 
directly  from  the  Text  discussion.  Vou  will  lind  them  helpful 
for  purposes  of  review. 

The  questions  which  are  starred  call  for  original  thought, 
the  ability  to  apply  the  knowledge  gained  from  the  Text  to  the 
solution  of  new  problems. 

1.  What  opportunies  for  profit  does  the  stock  market 
afford?  Discuss  the  methods  of  a  seasoned  veteran  outlined  by 
Mr.  Clews. 

*2.  When  inexpt-riencid  and  poorly  informed  persons  were 
buying,  as  indicated  on  the  chart.  Page  11,  WHO  supplied  the 
stocks?  When  they  sold,  WHO  took  over  their  stocks?  What 
conclusion,  which  will  increase  your  profits,  do  you  draw  from 
this? 

*3.  Mention  three  specific  errors  revealed  in  the  investi- 
gations made  by  Guyon  and  Gibson  of  brokerage  accounts. 
How  are  you  to  avoid  these  errors? 

4.  Into  what  three  types  can  you  classify  market  moves? 
What  is  Dow's  Law? 

5.  Describe  what  has  been  the  course  of  the  market  during 
the  past  twenty  years.  Name  specific  forcc^  which  ha\e  operated 
to  produce  this  course. 

*6.  "The  industrials  have  been  booming.  Isn't  it  about 
time  for  the  rails  to  have  their  turn?"  Note  the  diagram  on 
Page  27.     Do  the  rails  necessarily  mo\-e  with  the  industrials? 

7.  Sketch  clearly  the  course  of  corporation's  revenue  from 
gross  to  dividends.  Which  of  those  who  share  this  income 
have  priority  claims? 

*8.  'This  discussion  of  inflation,  exchange  rates,  crops, 
etc.,"  writes  a  subscriber,  "which  I  read  in  the  jjapers  impresses 
me  as  a  mass  of  generalities.  Why  does  the  editor  not  confine 
himself  to  individual  stocks?  That  is  his  real  business."  Is 
it,  or  is  it  not?  What  conclusions  upon  this  point  do  you  draw 
from  the  chart  on  Page  49,  for  instance? 

*9.  Do  Stocks  go  up  or  down  at  the  time  of  j^residential 
elections?     During  wars? 

10.  "The  annual  statement  issued,  by  the  Steel  Corporation 
seems  to  me  to  be  most  satisfactory.  Why  should  the  stock 
continue  to  sell  off?"  —  L.  D.  H.  How  would  you  answer 
L.  D.  H.'s  question? 


ANSWERS  TO  STARRED  QUESTIONS 
"FORCES  WHICH    MAKE   PRICES" 

*2.  The  experienced  and  better-informed.  These  are  often  referred  to 
as  "insiders"  and  professionals;  and  while  they  are  not  always  right,  they 
nevertheless  secure  very  satisfactory  results  in  general. 

The  conclusion  is:  Reverse  the  methods  followed  by  the  public  and  thus 
act  upon  the  methods  of  "insiders"  and  professionals. 

*3.  Bought  at  the  top.  Sold  at  the  bottom.  Loaded  more  heavily  at 
high  prices  than  at  low  prices. 

*6.  The  industrials  have  been  "booming"  evidently  because  of  their 
prosperity.  And  this  increased  business  in  turn  calls  for  increased  use  of 
transportation,  which  normally  is  reflected  in  larger  earnings  and  higher 
prices  for  rail  securities.  Moreover,  for  sentimental  and  other  reasons  within 
Wall  Street,  stocks  often  do  move  together. 

This  common  action  does  not  always  occur,  however.  The  industrials, 
newly  organized  and  their  securities  largely  "undigested"  made  compara- 
tively little  headway  in  1900-1502,  while  the  rails  advanced  sharply;  and  the 
rails,  with  their  rates  practically  unchanged  and  operating  costs  mounting, 
advanced  little  in  1915-1916  while  the  industrials  enjoyed  an  unusual  bull 
move. 

The  only  sure  way  is  to  keep  examining  the  forces  which  make  prices. 

*8.  These  topics  • — ■  inflation,  exchange  rates,  crops,  etc.  —  concern 
vitally  business  conditions  as  a  whole,  and  hence  the  earnings  of  individual 
corporations.  The  charts  on  Pages  49-50  indicate  that  fundamentals  and 
stock  prices  are  closely  correlated.  Since  the  editor's  real  business  is  to 
present  information  which  is  helpful,  he  properly  devotes  considerable  space 
to  fundamentals. 

*9.  These  are  old  questions,  which  during  every  election  and  war  are 
thrashed  over  in  Wall  Street.  Elaborate  deductions,  often  accompanied  by 
numerous  charts,  are  presented  showing  what  the  market  has  done,  and 
hence  what  it  should  do  this  time.  Considerable  benefits  can  be  derived 
from  all  this,  provided  conditions  are  similar. 

The  war,  a  bull  argument  on  industrials  in  1916,  turned  into  a  bear 
argument  in  1917,  when  the  United  States  entered  it.  Whereas,  orders  were 
large  in  both  cases,  new  factors,  such  as  the  excess  profits  tax,  changed  con- 
ditions decidedly. 


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